British Columbia Law Institute (BCLI) Releases Report on a Franchise Act in British Columbia

Members of the VCSFA had an opportunity to meet with Greg Blue of the British Columbia Law Institute (BCLI) approximately one year ago where we had the chance to hear more about the plans for a proposed Franchise Act for BC.  We created this post shortly after this meeting.

At this point, it was in the ‘consultation phase’ where feedback was being gathered by stakeholders in the franchise industry.  To read the original document, you can click this link and download it directly or go to the Franchise Act Project page at the BCLI.

We are pleased to announce that the conclusions from the consultation phase have now been compiled into this document: Report on a Franchise Act for British Columbia which can also be viewed/downloaded from the BCLI project page above.

In the near future, we will write a report with our feedback on the report.

The VCSFA would like to extend our most sincere thanks to Greg Blue and all the others who contributed to this worthwhile project as it has already contributed to the exposure of the oftentimes questionable nature of the Franchise-Franchisor relationship in general, but especially in BC, and will most certainly help any potential buyer (who does their due diligence) avoid some of the common pitfalls prevalent in the industry,

 

 

How a Few Law Suits Can Really Cripple a Franchise

Global TV aired a very, very damning broadcast about Zerona Canada today.  If you have been reading our articles at the VCSFA, you would not have been surprised at the kind of behaviour.

The summary of the lessons that one should take away from this unfortunate story are as follows:

  • Even a great product (or service) cannot make a business fly on its own
  • Franchisors make lots of claims that should be checked and then checked again
  • This pain would have continued and never been exposed if these courageous owners didn’t fight the dominant power – and yes, a franchisee is in a position of weakness before they sign up for the deal.
  • Support (or lack thereof) is *absolutely rampant* in franchising.  Amongst most cases we’ve seen you can only be sure you are getting one thing – the name.  Everything above that is [sadly] a bonus
  • Franchisors: you can only burn so many bridges before the skeletons of your past close in from all sides and you have no where to run but to the judge for mercy

As always, we are here to help franchisees of coffee shops – and beyond.  Don’t hesitate to reach out to us here at the VCSFA

Franchise Legal Advice Featuring Blair Rebane of Borden Ladner Gervais

This article published by the Canadian Franchise Association is an absolute must-read for anyone considering the purchase of a franchise.  What is not mentioned in this article is the fact that franchise law differs from province to province.  In British Columbia, for example, you need an especially higher level of legal advice and protection when dealing with Franchisors because there does not yet exist any form of franchise legislation.

One of Mr. Rebane’s wisest pieces of advice from the article is as follows:

“It’s key to get someone experienced in franchising because they not only tell you what the agreements mean, but what is standard and what is not,” says Rebane. “As someone who has drafted and read hundreds of agreements, I can quickly spot atypical clauses and point them out.” He notes that finding a lawyer with years of experience will also save money. “Someone experienced can get through the documents quickly because they know what they’re looking for without having to research it.”

One of our members gave his account of why this advice is so important:

When I bought my brand-name Vancouver coffee franchise, I was naive and assumed that all I needed was a lawyer who understood business.  How wrong was I!  Franchising is a completely different beast.  I chose a very expensive law firm, and I’m sure that my expensive lawyer was experienced in some form of business – he said he was but I didn’t check any credentials -but it wasn’t Franchising.  As a result, I ended up in a really bad deal with clauses that only came to life after I ran the day-to-day business and saw the business practices of the Franchisor.  Perhaps my endless headaches could have been avoided…

 

For more information on this and other related topics, be sure to search our site and the variety of different categories.

 

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.

 

 

 

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.