Before you Sell a Coffee Shop Franchise in Vancouver – Commercial Agents

Sellers Beware

“COFFEE SHOP FRANCHISE OWNER HELD HOSTAGE FOR ONE YEAR BY HIS AGENT

Imagine reading that headline in your local paper.  You’d probably want to read every word in the article to see how something like this could happen in a free country! Well, it does.  Right here in Vancouver.  However, it’s not the kind of hostage situation with guns and bombs,  but no less psychologically damaging and abusive.

What we’re talking about here is the fact that an agent can, by law, hold you hostage to the listing agreement you sign for a year (or whatever you happened to sign for).

Let us first state that this legal commitment is not necessarily a bad thing – in fact, it’s a good thing because sometimes sellers will abuse and use their agents and make them lose their justly deserved commission.  In that case, of course, the contract is a good thing to have enforceable.

Let’s allow one of our members tell you a true story of what happened to him this week when working with an agent that his head office strongly encouraged him to work with.  For anonymity, let’s call the head office company B and let’s call the agent M and the store owner A:

“I was approached by the leasing guy at B.  He said that M has a buyer.  B strongly recommended that I work with M because this buyer will help me get out of the business sooner. Also, B said they would drop the 7.5% transfer fee [that’s the money the owner has to pay to the franchise when he/she sells his/her store] AND M would not charge me a sales commission because he said this ‘was a favour to B’.  Since B has more experience in the sale of franchises, I took their advice and decided to work with M even though I had my own agent. Another owner had even warned me that this guy held him hostage before but I didn’t believe it.

Next, M shows up at my shop with what looked to be a basically blank document that I’ve never seen [see image above].  I’ve never listed a business for sale before.  He didn’t even explain it but just said “Sign here and this will be enough and then I’ll bring the offer.”  There was no explanation of what was on the document, what the document meant, nor what an ‘exclusive listing’ meant to the person signing.  I was about to learn the hard way.

A few days later , M shows up with an ‘offer’.  I couldn’t believe my eyes.  The ‘offer’ was for 25% of (or 75% less than) my asking price!!  What?  Are you joking, man?  So I threw the offer back at him and told him I don’t want to sell it.

During this time, my friend was selling his coffee shop franchisee, too, in almost the same situation.  In his situation, M brought an offer for 30% of what he wanted.  He contacted M and said “I’d like to end this relationship” and to him, like to me, M said ‘we don’t have a relationship because there is no commission.”  My friend still demanded the unconditional release documents and M replied “I’m a man of my word so I’ll send them if you want them.”  My friend told me that he thought it was strange that he is sending release documents for a relationship that M said didn’t exist.  When I called and ask for the documents he told me the same thing – there is no relationship.

I was happy now.  I immediately approached my agent (M2) and asked him to list my store for sale.  M2 happens to work in the same brokerage as M.  As soon as M2 listed the store for sale, M approached his broker and asked him to pull the listing because he had a one year exclusive listing with me! What?  No way.  Is this happening?  Yes.  Apparently it was something I signed for that I didn’t read.  M then called and left a voice mail for me saying “You have an exclusive listing agreement with me for one year and if you have any problems with that you can contact my broker.”  At this point it got very interesting.  I contacted M’s broker to complain.  He replied “M has the only rights to sell B franchises in Vancouver.”  I was shocked.  What was he talking about?  Did M convince his broker that he was the only one who could sell B franchises?

Immediately I contacted B and told them what was happening by email.  I asked if they would prefer to deal with my lawyer or with this agent.  They replied back shortly later that “We do not have any such exclusive relationship with M”.  At that point M’s broker was contacted and educated about the truth and asked M to send the release documents. Finally!  I’m free to list with whom I want.

That night I decided that I was going to work with M2 and started again to list with him.  This time M’s broker asked him not to list through their brokerage.  Now he’s trying to tell me which brokerage I can and cannot list with even though I do not have a valid listing agreement with anyone! Crazy.  To this day I am still arguing back and forth about this.  My friend had listed with six or seven different agents over the years and only one agent would not send the release documents – the B agent of choice: M

An exclusive listing is a cause of concern for the following reasons, we learned the hard way:

  1. You cannot reach out to the real estate board to get help so the agent operates to some extent ‘outside of the law’
  2. Your store does not get posted on the ICX.com (MLS for commercial) therefore loses lots of exposure
  3. You can’t work with another agent until this agent releases you

Here are some red flag comments that you should be aware of. They may be true but consider them a red flag until you see action:

  • “I have buyers looking to buy a coffee shop franchise right now.  Just sign.”
  • “I market the store privately.”  If you ask for details on this you may find out what that really means is “I only put your store on my personal web page and pray to the stars that a buyer finds it.”
  • They do not go over in detail with you the initial listing agreement or give you sufficient time to read the details

Here are some red flag comments that may indicate you are about to get sucked into some kind of secret game:

  • I’m not getting paid.  I’m doing this as a favour
  • The buyer that I had got sick, but don’t worry, we’ll find another one
  • I’m a man of my word

Why would someone volunteer to put themselves at risk as an agent for free?  Why did your ‘sure thing’ buyer disappear?  Why are you telling me you are a man of your word? By doing a transaction together with integrity I will see that.

We hope this article will save many people many hassles.

As usual, don’t hesitate to contact the VCSFA as we are always ready and willing to help anyone.

Before you Buy a Coffee Shop Franchise in Vancouver – Commercial Agents

Buyers Beware

A lot of people will start looking for a business to purchase on their own.  They might search the net for ‘coffee shop franchise Vancouver’ and up comes a bunch of ‘stuff’ – mainly private websites of commercial agents who are listing coffee shop franchises for sale.  So, you look around their sites and you see that they have lots of listings so they must be good!  They must be great.  How could all those listings be there if they weren’t great? Don’t be too sure.  Also, be super cautious if an agent seems to only work with just a couple of chains (ie. Blenz only, Wave’s only, etc.)  This would indicate there ‘may’ be a back room relationship with head office and the agent and this may not be to your advantage.  You will learn why this is the case when we publish Part 2 “Before you Sell a Coffee Shop Franchise in Vancouver”.  We just ask that you, for now, not consider this an advantage until you learn more about the possible implications.

Let’s say you decide to move forward with such an agent.  Typically they are ‘double ending’ the deal so you should be extra careful that the agent is looking out for your interests. What ‘double-ending’ means is that they find the buyer themselves and get paid by the seller and since there isn’t another agent involved, they keep all the money themselves. $$Cha-CHING!$$

By law, this agent has a duty to protect both the buyer and the seller, but let’s be realistic – the agent gets paid when the store sells and usually the more it sells for the more money the agent makes.  Use caution. The agent may have very high integrity, but if that person doesn’t… yikes.  The VCSFA strongly, strongly recommends bringing in another commercial agent with whom you have trust to help you close the deal to make sure you are not buying a bad deal, especially if this is your first business purchase.  This is for YOUR protection and it’s worth it.  If the agent suddenly disappears when they find out you are bringing in another agent, you might want to question ‘why’.  A better strategy would be to not contact the agent first from his/her personal webpage or advertisement if you happen to find it on your own. Instead, find yourself a good commercial agent and then have that agent contact the seller’s agent on your behalf.  If that agent refuses to work with another agent, quietly contact the owner of the store and tell them what’s going on – they deserve to know that their agent is not looking out for their interests and turning away perfectly good buyers.  Yes, we are writing this because it really happens out there.

If you are looking for a professional agent to represent you during a purchase, please see our VCSFA Approved Agents listing who have proven to be professional and hold the interest of their clients at the top of their priority list.

If the agent is NOT listed here, and they are based in Vancouver you could contact us and we will research the agent and give our opinion.

Here are some questions you should have answered by a listing agent who is listing a coffee shop franchise in Vancouver before you decide to work with him/her regardless of how much you think you want the business that’s listed:

  1.  Is this agent on the VCSFA approved agent list?
  2.  If not, ask the agent why and have that agent contact us at info@vcsfa.ca for consideration of inclusion.
  3. Ask the agent to produce some reference from some buyers who bought a business through him and ask those buyers if they were satisfied with their experience.
  4. Check to see if the properties are listed on the ICX website as well as the place you found it.  If not, why? They could be avoiding other buyers with agents for the purpose of selfish gain, not the interest of their client, which would indicate this person may not be an agent you want to deal with.  NOTE: many agents do ‘exclusive listings’ but this is usually agreed upon with the listing story.
  5. Ask if they have any problem working with your agent (if you decide to contact them on your own).

 

Five Things you should know Before you Buy a Coffee Shop Franchise

Well here is the $200,000 + article that I wish I read.  Part of our goal here at the VCSFA is to educate the public about some of what goes on behind the scenes in Vancouver because we do not have government legislation to help.  If you are reading this before you buy a coffee shop franchise, make sure that you go over each one of these points and make sure you understand their implications.  If you don’t understand, always feel free to email us and we’ll offer our help.  If you already own one, you should immediately become a member of VCSFA and work with us to help fix some of these issues that bring such a dark cloud over the franchise business model – we believe at the VCSFA that it could and should be a very win-win industry.  We hope that someone will benefit from this and please feel free to send us donations. This advice has come at a price tag of literally millions of lost dollars. Give generously to the VCSFA and it will always come back to benefit society.

1.  The Franchisor can and does mark up the product before it reaches the store

The franchisor is always very quick to teach the following basic business concept to its new franchisees (you have probably heard it already yourselves):

It’s easier to get more money out of your existing customers than finding a new one.

How true!

But… Who would expect that the Franchisor would perform the very same thing on its Franchisees (partners) the whole time?

Most people think that the franchise owner enjoys the benefit of group buying power from all those stores out there and thus receives better prices so they can make more money.  Wrong.  Written in many Franchisee agreements is a clause that looks somewhat like this

“The Franchisor has the right to take that group buying discount and keep it for themselves and you agree that this is ok.”

Of course it looks much more ‘legal’ in the real contract but that’s what it says so fool after fool signs it and while doing so signs away the lion’s share of their profit.  This is a severely punishing situation.  It has been reported to us that one large coffee chain in Vancouver marks up their coffee up to FORTY PERCENT before it reaches the store!  On the poor Franchisees’ largest expense outside of rent and labour the Franchisor enjoys a nice income while the Franchisee pays the same as the independent shop across the road.  You probably think to yourself, ‘That’s ok.  In a chain like that they probably don’t charge a royalty or they charge less.’  Not so quick, Sherlock.  The same aforementioned chain charges the weighty 8% royalty with another 2% marketing pool and even has the right to raise those rates over time.

It has been reported to us that some chains in Vancouver even own their own supply chain and therefore it would be even more difficult to find out what they really pay for their product. Very smart.  I’m sure none of the Franchisees would complain if those prices at least felt like wholesale prices but that is rarely the case.

2.  The Franchisor does not have to reveal to it’s Franchisees what they are planning to do with the lease

Imagine you buy a store with a supposed ten year lease.  They call it a ‘ten year lease’ when in reality it’s usually a five year lease with a five year renewal option.  And that still sounds reasonable except… the renewal option is exercised by the Franchisor, not the Franchisee!  Read that last part again if it didn’t sink in.  Imagine, you are on year number two.  Your wife has a baby so you decide you don’t want the headaches associated with running a coffee shop franchise (and if you didn’t know there would be headaches you definitely need to get out and do some serious research!).  So you call up the head office and say “I’ve decided to sell.  It was so much fun working with you but my wife had a baby and I need to move on.  Can you please put in writing that I have three years plus five years left on my lease so they can move forward with the purchase?”  To your surprise they reply back “We’re not sure what we’re doing with your store so we can’t put that in writing.”  That’s right.  They completely deny your request to put in writing that they will exercise that option – and they don’t have to contractually do anything until about six months before the lease ends.  So, your store now has three years left on the lease that you can guarantee to your buyer.  Good luck selling that one.  In some cases, we have heard rumours that a Franchisee will just walk out one day because they can’t sell their store and then magically the store is reopened a few days later by a new owner or is being run by head office complete with a nicely extended lease.  Hmm…..

3.  The Franchisor Can Deny Your Buyer

So, let’s say you finally got a buyer to agree to buy your store.  They pull out their money from the bank and flash it in front of you to prove it.  Nice.  Everything’s ready to go.  You sign the offer, the deposit is transferred into the trust account and all we’re waiting for is one subject to be removed from the contract: “Subject to Approval by Franchisor’

Of course, these folks always reassure you that the basis that they would deny a buyer would be on ‘reasonable’ grounds… like English level, for example.  It seems reasonable that they should be able to deny on the grounds of English level because they have to communicate with their Franchisees effectively, right?  Except…in one coffee shop franchise chain it is rumoured that one of the executives struggles immensely with his ability to communicate effectively in English!  In fact, much of this chain’s head office staff are new immigrants and their free help (interns) as well.  Not only that, but if you go around town and sample the English level of recent Franchisees, you’ll note quickly that there is some ill communication out there – some Bad English if you will.  This ‘English level’ card is pulled regularly to deny legitimate buyers and much research should be done in this area to bring this to light.  So, then, you might ask yourself “Who is the best kind of buyer? Who will they approve quickly?” Our answer: Your guess is as good as ours – kind of like pin-the-tail-on-the-donkey.

4. The Franchisor Profits When you Sell Your Store

How would you like to pay your Franchisor 40% more than you should for your bag of coffee, then pay them another 10% when the customer pays you for their coffee, and then, when you sell your store, pay them another 7.5% on the total sale price?  Now THAT’S how you get more money out of your customers!  Why bother expanding when you can keep introducing new ways to suck more out of your existing ‘Franchisee Base”?  I guess that’s ‘free enterprise’, right?

5. The Franchisor May Force a Renovation Upon You

Imagine this: the economy crashes because of, say, a housing bubble.  The whole economy falters and customers stop buying lattes because their local newspapers tell them to do that.  Sales drop.  Business is bad.  Your lease is coming to an end in a few months.  You go to your mailbox and what do you find?  A letter from your Franchisor informing you that you will be renovating your store on your tab if you wish to continue to have the right to run this money-losing business.  Golly, Beaver.  I don’t have any money!  That’s ok.  You’ll find the money.  You’ll borrow it from your family, or, if they can’t find it in their bank, you may have to take out a loan against your house.  If you were a member of the VCSFA you could rally financial support to get you through it as one member did. In one case in the lower mainland, a store was reported to have done a partial renovation and then magically shut down about a year later.  The owners lost their house.

Or, you could do what those other people did and just lock the door and walk away only to see your store appear open again under new management.   What’s really funny to us over at the VCSFA is that the corporate owned store of one of the biggest chains in Vancouver has not been renovated since before Noah’s ark came to dry land.  It would be good for all reader’s of this article to ask where the corporate store is and make sure they are staying on the cutting edge of their ‘new look’.

In conclusion, the VCSFA is here to help.  Don’t hesitate to contact us.