Article by Tony Wilson about Franchise Legislation in BC

Tony Wilson is respected around town (Vancouver) as a Franchise Lawyer which is why when he writes an article in the Globe and Mail, the VCSFA pays attention.  In this recent article “Franchising is Big in BC – So Where’s the Legislation?”, Mr. Wilson talks about the British Columbia Law Institute’s (BCLI) consultation paper on franchise legislation in BC.  He explains BC’s odd position of being one of few provinces that remains without franchise legislation and even brings up an argument that the legislation may not bring notable changes as follows:

But will it [bring change]? If most franchisors in Canada – including those headquartered in B.C. that are selling franchises in Ontario, Alberta, Manitoba, PEI or New Brunswick – must comply with the legislation in effect within the disclosure provinces anyway, it is arguable this will add little more in terms of compliance costs to B.C.-based franchisors. They will simply adapt their FDDs to include B.C. Franchisors in other provinces will do the same.

Thankfully the VCSFA has had the honour of meeting with some of the people involved in this consultancy report and have been able to express our position on the matter.

Although Mr. Wilson is correct that many reputable Franchises are currently operating in compliance with other province’s franchise legislation and that they will be able to quickly adapt to any implemented BC legislation, this doesn’t take into account the fact that there are BC-born Franchises that have been operating without it for years *here in BC* and continue to sell stores.  Take for example the following ‘bigger name’ coffee shop franchises from our Francouver list that are either BC-born or operate primarily here:

  • Bean Around the World
  • Blenz Coffee
  • BG Urban Cafe (formerly “Bread Garden”)
  • Serious Coffee
  • Take 5 Cafe
  • Wave’s Coffee
  • Wired Monk

We have received local Vancouver reports from current and previous Franchisees involving horrific business practices that have resulted in bankruptcies, broken families, or other similar tragedies. In fact, some of the stories are so bad that you would be hard pressed to believe that the events could have possibly taken place in Canada.  Some people have been begging us to bring some of these stories to light and the companies behind them, but we are convinced that by means of the current court systems and eventual Franchise legislation in BC, that nasty people will be unable to continue in their nasty ways.

Do not think that just because a Franchisor is complying in other provinces that they will play nice and follow suit in BC.  We need clear and reasonable legislation right here at home.

In conclusion, let it be known that the VCSFA takes a very strong position *in favour of immediate Franchise legislation* so that it becomes very difficult for Franchisors to commit premeditated acts of business atrocities in our beautiful country, and especially in our province of British Columbia.

 

 

 

New Service – Free Contract Review

Thinking about buying a coffee shop franchise but you don’t want to spend money on a fully qualified lawyer?

Already bought one and don’t understand what you signed?

Why not schedule a time to meet with a VCSFA Coffee Shop Franchise Volunteer Consultant, get some free advice from an experienced Franchisee who understands the contract well?  After reviewing your contract they will be able to point out areas of concern so that you can make the best choice for you and your family.

Although our volunteers are not lawyers, they have themselves worked with a variety of lawyers on a variety of topics related to these contracts and are well aware of how these oftentimes confusing contract clauses can significantly affect your future.

Not in Vancouver but still need our help?  Don’t let distance prevent you from reaching out to us.  We’ll find a creative way to help you because we are passionate about what we do.

Although this is a free service run by volunteers, we do hope that you will find a huge value and, after receiving your advice consider making a contribution to the VCSFA so that we can continue our work bettering the lives of coffee shop franchisees.

 

 

 

Great Educational Document about Franchisee Advisory Council (FAC)

We were very excited when one of our members came across this absolutely top-notch document produced by the International Franchise Association

If you are a franchisee and are part of a franchise system that has not yet started such an important legal entity, or, if you are in the process of starting one, it is absolutely crucial that you read through this document and understand how the organization should be setup, what it’s for and much more.

Here is a direct link to their PDF:  Direct Download to Franchise.org’s Franchise Advisory Council document

Download it.  Save it. Read it.  Don’t lose it!

Another huge thank you to the International Franchise Association for publishing this.

And for the road, here is another link we immensely benefited from and hope you will, too

How Does a Franchisor Make Money – Approved Vendors and Rebates

Franchising is a business model developed by entrepreneurs for entrepreneurs.  To be successful in the long run, the model must offer both the franchisor and franchisee the ability to make more money than if the franchisee was to go it alone.

For a franchisor, the sources of income are typically derived through a franchise fee, management fee, royalties, rebates and advertising fees.  For this article, we will be discussing the question of confidential rebates and cost of goods sold to a franchisee.

“Approved Vendors.”  Consistent quality goods, volume purchasing power, adherence to contractual agreements and conformance to industry standards and regulations.  All good reasons to have approved vendors.

Suppliers will offer franchisors financial incentives (rebates) based on franchisee purchases.  And often, franchisors include a clause that states a ”franchisee may only purchase supplies from the approved vendor list” and that “the franchisee agrees to give up any benefits of the volume buying power of the chain to the franchisor”.

A good franchisor understands their responsibility to their franchisees with respect to approved vendors.  A good franchisor will disclose confidential rebates received and explain how they intend to apply them.  A good franchisor also would not compel a franchisee to deal with approved vendors if they cannot show that this is absolutely necessary to protect the brand or delivers other benefits.

But what happens in real life? Here is a true story. Bill (not his real name) buys an existing coffee shop franchise.  In the second month, he realizes he needs a new coffee brewer, so he gets a quote from the approved vendor.  He is amazed at the very high price and decides to comparison shop, but there is no competition, since the approved vendor is also the sole distributor.  So, he informs his franchisor that he would like to buy a different less expensive and superior machine.  The franchisor flatly rejects his request and points him back to the approved vendor; no explanations. The sad franchisee accepts his fate and buys the approved machine.  A few months go by, and the valves need to be changed and the other equipment needs to be checked.  A service technician does ‘some work’ on the machines resulting in a fried circuit board. The angry franchisee asks the technician to fix it, but the technician blames the franchisee’s staff.  To make things worse, the technician not only forced the owner to sign to authorize the work and make payment immediately.  A few months later, the franchisee he needs basic maintenance on his expensive espresso machine so he calls Vendor B to fix it.  Vendor B sadly informs him that they are not able to help him because the part they need can only be obtained from Vendor A, the approved vendor of the franchise! The moral of the story – don’t deal with a poor franchisor?  Why does a franchisor approve and force upon the franchisees a vendor that provides poor service and overcharges?  Why couldn’t the franchisor provide any justification for using that supplier?  What financial arrangements were in place that caused the prices to be inflated?  Did the franchisor receive rebates, or free servicing, or free machines?

A great franchisor would share the confidential rebates with their franchisees or allocate those payments received to mutually agreed projects. Sadly, in B.C., we have no such legislation that compels franchisors to do the right thing for their franchisees.  It is no wonder so many coffee shop franchisees have pained looks on their faces when you mention “approved vendors”.

The VCSFA recommends all potential buyers steer clear from a franchisor that promotes business practices that force the franchisees to accept approved vendors that do not supply clear demonstrated benefits: better/faster service for the same price as the competition, lower pricing, superior products, etc.  Ask what existing franchisees pay for their core supplies (milk, coffee, bottled drinks, sandwiches, etc) against an independent cafe.  If the franchisor avoids talking about this, or even acknowledging that they receive rebates, then run away. The franchisor is receiving a financial benefit, and they don’t want you to know.  And if you cannot trust the franchisor on the most basic questions, how can you trust them with the more complicated questions?

And a last thought: what happens when a franchisor decides to make money on approved vendors that do not relate to supplies?  What if a franchisor wants to be the SOLE supplier of EVERYTHING related to the franchisee operation: renovations, equipment, supplies.  And naturally, make money on each of those aspects?

As always, do not hesitate to email us with any questions or comments.

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.

 

The Franchisor’s Wheels Keep on Churning

This article submitted by a founding VCSFA member.

It’s really quite disturbing and addresses a term called ‘churning’.  The idea behind ‘churning’ is that a failing franchise can be taken back by the franchisor, or a firesale can occur with hopes that the new owner can make it break even.

This just perpetuates the system that has become akin to urban business slavery.   The customer sees the chain as successful because the stores never seem to close, yet the reality is is that the pain is merely passed on to the next franchisee all the while the franchisor gets some money during the purchase and sale of the existing store and always gets their royalty.

This article is worth reading and considering if you are thinking about buying a coffee shop franchise.

 

Wikid Franchise dot Org – A Possible Ouch for Franchisors

I suppose the VCSFA has become to many coffee shop franchisors in Vancouver the proverbial thorn in their side.  Word is getting out that we exist and that our purpose is to educate the public about franchising – coffee shop franchising to be specific – and that the relationship between the franchisor  and franchisee must be one of both give and take.  It must be one of both speaking and listening.  It must be one of democracy and fairness.

This video is painful to watch because its creator was obviously part of a franchise where such necessary components of the relationships were absent.  During the video the characters gave reference to a website that we had not yet stumbled upon – WikidFranchise.org – the ‘wikileaks of franchising‘ it seems.

We have not verified yet the quality or accuracy of the posts found within, but it is certainly a goldmine of ‘internet information’ that may contain truthful information posted anonymously – a franchisor’s worst nightmare and a great blessing for the purchaser of a franchise.

Call us old fashioned, but we still really believe that the franchise model could be a very profitable and amicable one.  There are surely such franchises out there.  Until they are all superb in their business dealings, it is necessary for organizations like ours to make sure that the public is aware of what’s out there.