Who profits when a $500-million Canadian class-action franchise lawsuit happens?

June 21, 2017

The least likely are individual franchisees.

That may or may not happen especially when 98% of all lawsuits never make it to trial and withstand an appeal.

The negotiations are held between the 2 lawyers. Franchisees are decision takers.

Parties:

  • Franchisor (defendent) – the only payer, repeat player, credence good monopolists, (happier to pay 2 law firms a lot rather than a little to hundreds of franchisees)
  • Franchisor’s Specialized Law firm – only one in Canada, repeat player, expert credence good provider, member of franchisor association
  • Franchisees (plaintiff) – one time player, only non-credence good player, unskilled but unaware
  • Franchisee’s Specialized Law firmonly one in Canada, repeat player, expert credence good provider, member of franchisor association

Both CDN law firms (one for the franchisor, one for the franchisee) at this level are businesspeople, first and foremost.

The two law firms act as rent seeking coercive monopolists.


Tim Hortons operators might listen to Bob Purvin’s sage advice about franchisee associations

April 28, 2017

Legal advice is necessary but it should not lead ANY franchisee group. Do not allow any lawyer to capture control.

AAFD chairman and founder Bob Purvin

In a conversation with BlueMauMau.org, AAFD Chairman Purvin: Power of Franchisees in Bargaining and Cooperatives in Reducing Costs:

SNIEGOWSKI: Some franchisee associations, frankly, seem banded together merely as an excuse for a class-action lawsuit against the franchisor to resolve a grievance, or at least the threat to the franchisor of one.

PURVIN: Sadly, that is too often the case.

If a lawsuit is the only reason for a franchisee association to exist, it will disappear five years after its startup or until the next round of franchise contract negotiations. The successful associations do more.

The Griswold Healthcare Franchise Association [GHFA] is an example. Franchisees created a fabulous task force on best practices that worked with the company to put on seminars each month. They have great turnouts for their seminars, which are done by webinar. They are now getting involved in lobbying, especially around the issue of caregiver wages. Their legal fund is dedicated to working with various state and local agencies over the rights of caregiver business owners.

Griswold created a products committee, where the franchisee association is now getting involved in the supplier side in a collaborative way. It is not just the franchisor that is cutting a deal with this supplier [getting kickbacks] and mandating that franchisees use that product to enrich the franchisor.

Associations can be more about the supply side than about renegotiating the franchise agreement.

Let me repeatAssociations can be more about the supply side than about renegotiating the franchise agreement.

American Association of Franchisees and Dealers

Rule of Thumb: add together what you’re paying for royalties and ad fund (ie. 4 and 3 = 7%). As a franchisee that does not have a franchisee-led and -owned buying co-operative, you’re putting an additional 7 per cent of hidden cash into your franchisor’s pocket via product and equipment costs.

AAFD-Conf-Logo-200px


Who is best to consult to a few Tim Hortons franchisees in their relationship with 3G Capital?

January 18, 2016

I did the franchising industry forensic accounting (diminishing gross margins) for the National Bread Network.

20160118 NBN card front

A membership program was developed and executed. The initial ROI leverage was impressive to 100% of the Canada Bread franchisees. See one of three direct mail pieces.

20160118 NBN card back

In the end, the few elite investors made much, much more.


How efficient and effective are the best franchisors in using their franchisees’ store investments?

February 25, 2015

Of the investment resources they attract, do they use them effectively or are they squandered?

Efficiency drucker

I chose some of the more “blue chip” of the U.S.-based systems and chased down their 2013 FDD (thank you the state of Wisconsin).

Preserving Franchisee Investments

Opportunism is when someone in a position of advantage, uses that position against another. In franchising, the situation that the franchisor controls the store’s sunk cost investment, can be exploited. A very good test of opportunism is: If the ownership of the assets were reversed, would the alleged “opportunist” likely change their decision?

Total Added Lost

While the 5 systems grew by 4,342 new stores (adding +$6-billion to franchisors’ coffers), there was also a loss of 1,738 stores or $2.5-billion of franchisee store investment that left the industry.

How goodHow “sticky” are franchisee investments in these systems? On average for every $1.00 of new franchisee that enters the market 42.2% was lost from 2010 to 2013.

Distance

 

Measured from the best practice level of Dunkin’ Donuts, there is some very large variation in these systems as they purport to take care of “other people’s money”.

leaky_bucket

Losing over 40% of the invested capital in 4 years? It seems the franchise industry is a bit of a leaky bucket.

  • Fairly apparent when the information is publicly available.

Kudos to the states of California, Wisconsin, Minnesota, Washington, and soon-to-be New York for their online repository of franchise disclosure documents.


Why is it so hard for Canadian entrepreneurs to access franchise disclosure documents in Canada?

February 24, 2015

Perversely, much more information is available via U.S. internet sources for Tim Hortons franchises than can be found north of the 49th parallel by an independent researcher.

Tim usa

Since 1979, the U.S. Federal Trade Commission has required all franchise disclosure documents to be publicly available (the Franchise Rule). As an example, this is the first of 555 pages of the free online copy of the 2013 Tim Hortons Traditional FDD. This is critical information; similar to financial market prospectuses.

Tim Hortons USA Inc 2013 FDD

It’s as easy as going to the Wisconsin site, typing in the name of the system, and more-often-than-not a free pdf shows an unbelievable amount of investment disclosure information.

How about getting the most recent filing for Tim Hortons in Canada? On Feb 17th, I emailed the new owners and asked for a copy and received this reply:

Dear Les Stewart:

Thank you for your message. All of the information we are able to provide the general public is available on our website. If it is not on the website, we regret to inform you it is proprietary in nature and we are unable to fulfill your request.

Sincerely,
The TDL Group Corp.
Angelee ,
Franchising Canada Representative

The Ontario law is called the Arthur Wishart Act (Franchise Disclosure), 2000. It’s disclosure requirements were modeled on the U.S. model.

Disclosure requirements (standard format, both U.S. and Canada)

  • bankruptcies (p. 17 of the U.S. Tim Hortons Traditional FDD),
  • litigation history, (p. 15),
  • corporate-, franchisor-owned outlets (p. 72),
  • franchised stores: terminated, non-renewed, re-acquired, ceased operation, transferred, and sold-but-not-opened (by category for 3 years, p. 72),
  • fees (royalty, advertising, computer, other, p.17),
  • franchisor’s financial statements (p. 85),
  • list of current franchisees: name, address and telephone number (Exhibit O: p. 333),
  • list of recent former franchisees: name, address and telephone number (Exhibit P: p. 387),
  • restrictions on sources of products and services (and amount $ franchisor receives, Item 8: p. 32),
  • entire franchise agreement (p. 133), financial representations (Item 19: p. 69) and
  • leases, trademarks, etc.

The Ontario government/Wishart currently does not require either (1) public filing or (2) an online repository of documents.

I believe Canadian small business investors deserve as much access to this financial information than do our United States neighbours.

How can we have informed public policy without publicly-available, agreed-to data?


How frequently does Tim Hortons terminate their franchised stores in the United States?

February 24, 2015

Termination of a franchise agreement is the most financially devastating action a franchisor can take.

Terminations 2013

It is the “weapon of mass destruction” for mom-and-pop franchisee life savings and employment

Terminations 2012

 

Responsible franchisors avoid this too because it is such a red flag to the investment community.

Terminations 2011

It is only fair to compare it to their peer group and to best practices.

Terminations 2010ie. Tim Hortons terminated their U.S. franchisees 22.9, 1.1, 2.1, and 9.4 times more frequently than McDonald’s had done in the same year (2010 to 2013).

The frequency that the franchisor chooses to terminate a franchisee is a material fact to any buying or renewing franchisee.

Source: Information from Franchise Disclosure Documents (see for example Wisconsin Department of Financial Institutions). Free download for U.S. filed documents. One of 4 online sources.

Canadian information is unavailable because no provincial law requires these CDN documents to be (1) publicly filed or (2) put online.

Alberta, Ontario, New Brunswick, Prince Edward Island, Manitoba and soon-to-be British Columbia

Posted also on ConcernedTimHortonsFranchisees.ca.


Will “brand strength” or hard fought-for legal provisions likely preserve Tim Hortons franchisee, staff, supplier and communities relationships?

February 23, 2015

In 2000, Tony Martin asked Tim Hortons VP Nick Javor which of their franchise agreement terms protected franchisees when a merger happens.

lao

In his public hearing testimony which lead up to Ontario’s 1st franchise law, Mr. Javor seems to suggest the “brand” is strong enough. He was silent on the contract provisions needed.

Mr Martin: I don’t think there’s anybody who’s suggesting that there aren’t good franchise systems around, and certainly Tim Hortons presents at this time as one of those good systems, for all the reasons you’ve laid on the table here today. What you have we want for all the systems, because when a system goes sour, as you suggest in the Pizza Pizza case, you’re all painted with the same brush. That’s unfortunate. It affects a good business relationship and ultimately probably affects the franchisee the most because they’re the most exposed and vulnerable.

My concern is when good systems get sold, and that’s happening. There’s a trend today where the bigger guy eats up the smaller guy and the relationship changes. We had that experience here in Sault Ste Marie where Provigo bought out Loeb and wiped out two of our best corporate citizens overnight. They slept in their stores for two weeks to protect their interests. That’s how difficult that was.

We’ve heard that 241 Pizza has just bought out Robins Donuts. What happens if tomorrow Pizza Pizza buys out Tim Hortons? Do you have anything in your agreement with your franchisees that protects them in that instance?

Mr Javor: That’s a very good question, Mr Martin, because this is the day of mergers and acquisitions. This is the business strategy of a lot of folks. I would answer your question with perhaps a description of our franchisee relationship. I think successful franchisors and chains and brands get successful not by accident but because of the hard work and everybody’s focused on a mutual goal. The mutual goal in our organization, and other franchisors who have been privileged to be as successful as us, is clear: to deliver customer service and realize that the way we get excellent customer service is by having franchisees who are committed to that. We have a strong culture of excellence and commitment. I think it would be very difficult for a new ownership group to come in and absolutely take away what’s taken us 30 years to earn and to grow together with our franchisee ownership.

The fact that we involve our owners a lot in our business at the advisory board level and committee level that I mentioned earlier I guess is a testament to the strength of that commitment we have to ourselves in the marketplace, and that is bigger than the contract. It takes many years to change cultures at corporations. Those of us here who have been in private business over the years understand that. Truly, yes, the top of the house or the CEO and president help set the tone – that’s well-documented research – but also when you have a strong commitment at the grassroots level in your community, where your franchisees are absolutely actively involved in supporting your community, because they know where their bread is buttered. It’s not downtown Toronto, it’s all the communities where we have stores in our particular chain across the country.

I honestly think that when a merger and acquisition comes along the strength of the brand will come through based on these types of commitments and relationships.

Mr. Javor and Tim Hortons were active in the spirited behind-closed-doors debate of the proposed amendment to the Arthur Wishart Act, Bill 102 in 2010: here, here and MPPs seek anti-swindling law for franchises.

Mr. Nick Javor, LinkedIn


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