Style Over Substance: A Nightmare Recipe for Vera’s Franchisees

veras-wink

It was the best of times for Gerald Tritt and Noah Cantor, co-founders of the Vera’s Burger Shack franchise, as the summer of 2011, saw Vera’s Burger Shack ink a deal to expand the Vera’s franchise to the United States Pacific Northwest.  Vera’s was flushed with a run of several years growth and had grown from a seasonal concession stand in West Vancouver to a flourishing franchise with sixteen locations.  However, it wasn’t to last – without an underlying business model that went beyond depending upon the personalities of individual Franchisees and a cartoon logo – it could not last.

A clue to the coming debacle for many of the Vera’s franchisees can be found in Gerald’s choice of individuals to expand the Vera’s brand in the USA.  The purchaser, Paul Brown, a promoter, who promoted such sport luminaries as Tonya Harding, figure skater turned boxer, appeared, at least according to Vera’s own press release,  to have no experience in operating a single restaurant, let alone operating/managing several restaurants within a cohesive franchise system. On the face of it, Gerald and Noah seemed to want someone to promote the brand as oppose to having someone with strong restaurant experience to screen and assist prospective franchisees in opening Vera’s franchises in the Portland area.

Up to the time of the signing of the U.S. expansion deal, Vera’ s Head Office had often emphasized style over substance when managing the growth of the Vera’s franchise system.   A failure to establish a head office training system for new Franchisees, a comprehensive training manual, regular inspections, and even one method of cooking the burgers had led to an absence of standardized behaviour across the Vera’s franchise system.  All the while, Gerald Tritt was fond of telling Franchisees he had spent over a $100,000.00 on branding the Vera’s name.

By the spring of 2013, Gerald Tritt had found himself rid of his most troublesome Franchisee who had made the painful business decision to lose six figures as oppose to continue being a participant in a franchise system that was failing to maintain standardized behaviour amongst its Franchisees.  However, it was clear that franchise’s troubles were just beginning.

By August 2013, eight of the thirteen franchises were listed for sale (and this was excluding the two that were sold at the beginning of the year) – a stunning indictment of the Vera’s franchise system for the stampede of Franchisees wanting out was nearly as crowded as the last train rolling out of Paris in June 1940 before the Nazi advance.

It is now over a year since the Franchisee stampede began and with the exception of North Vancouver and Broadway (which sold at a loss of at least six figures to its franchisee – see A Poor Broadway Performance), the remaining six Franchisees continue to list their stores for sale – albeit some at substantially reduced listing prices.  It was rumoured that others were listed for sale but these cannot be substantiated at the time of this article.  The U.S. expansion plans remain exactly just that – plans.

To date, Vera’s is limited to being a Lower Mainland franchise with half of the franchisees wanting to sell and with its head office having no immediate plans to open locations elsewhere in Canada or the USA.  As Gerald Tritt’s plans for a thousand store empire slowly fade to oblivion, the Vera’s nightmare lives on for its Franchisees.

veras-wink

Burger Kings Purchase of Tim Horton’s and What it Means to Its Franchisees

Will Tim Horton’s Franchisees win or lose in this massive food and beverage deal as Burger King gobbles them up? And will they sell Tim Burgers?

It’s pretty rare to have news this big in the food and beverage industry, and especially one that impacts Canadian business so directly.  A quick search engine search on the keywords reveals articles like this one in the CBC.  This article is loaded with neat little stats about how big the two companies are, how much there shares went up and down, market cap numbers, guesses on why they did it,  what they will do next, and so on.  A very typical ‘business article’.

The article also went into details about the ‘important’ parts of the deal including where the head offices would be based, shareholder cash payments, and the like.  However, the following statement jumped off the page: “That would bring the cash value of the deal for current Tim Hortons owners to more than $94 per share.”   In particular, it is the usage of the word ‘owners’ that is most intriguing and one that leads to a new question: “Who owns a Tim Horton’s store?”

“Who owns a Tim Horton’s store?”

Perhaps a better question to start with is ‘what is ownership?’

According to corporate stuff, it’s someone who owns any number of shares in a corporation.  In real estate, it’s the person or entity whose name is on the title document.  For cars, it’s the ‘registered owner’ on the document you hand the police when they pull you over.  In small business, it’s the person upon whom takes the ultimate financial risks associated with it’s success or demise.

However, anyone involved in any of these ‘ownership’ scenarios knows something deeper: in corporations, it’s the person with 51% of the shares who has power.  In real estate, it’s the person to whom you pay your taxes who holds the power.  With cars, the police officer holds the power and tells you how you are going to use your car, and in small business, it’s the landlord, health authorities, and, in some cases, the Franchisor who holds the power.

So, does ownership really even exist? Or does the more important question when you make an investment become, ‘Who holds the power over my investment?”

Tim Horton’s was built on the back of it’s Franchisees, on their hard earned investments, and on their long, hard days serving the public cheap coffee.  Although these ‘business articles’ will talk about ‘revenue from royalties’ on the books, when was the last time you heard about Tim Horton’s from the perspective of a Franchisee?

Although this merger looks like a good deal for the power holders (shareholders and directors), one must wonder what will happen to the Franchisees.  Will things get better?  Will things get worse? Even more frightening of a question is “Does anyone even care?”

Customers just want their cheap double double.  They don’t care who hands it to them.

The Franchisor just wants a higher share value, sometimes at any cost.

Would anyone care if the Tim Burger’s global strategy one day switched from ‘Franchise Partners’ to ‘Corporately Managed’ stores like Starbucks did?

So next time you order your six pack of Tim Burgers or Whopper-Whopper think of who really built this business and be concerned.  This is your brother, uncle and neighbour, not a number on a stock exchange.

Franchising, Suffering, and Stockholm Syndrome

Franchising, Suffering, and Stockholm Syndrome

Over the last couple of months, we have been involved in painful conversations with several coffee shop Franchisees which was not unlike the dialogue a parent might have with their children about the dangers of drinking and driving or getting involved with gangs.  The older, wiser parent explains – from their own experience – the death and pain surrounding these important life decisions and why it’s important to avoid bad decisions at all costs.

In the first dialogue, the Franchisee had already been abused by their Franchisor when asked to cough up a large amount of money that was clearly for the unilateral gain of the Franchisee and the unilateral pain of the Franchisee.  Yet the Franchisee paid.  The Franchise also told us that the business was for sale and has been for a long time.  We explained that the commercial agent the Franchisee was using was highly questionable and may have other motives than the sale of the shop.  Yet, the Franchisee continued to use this agent.  This person even went so far as to explain that there was no happiness surrounding the business and it is not making much if any money.  Yet this person remains the Franchisee on record for that location today.

In the second dialogue, a Franchisee who has watched several other owners in the same chain get raked over the coals by exorbitantly priced – and forced -renovations (which lead to their eventual demise) reached out to us for our advice.  Can you guess what our advice was?  You guessed it.  We said, “Run for the hills and do not look back.”  Yet, it is rumoured that this Franchisee is about to hand over the money!

These two dialogues have resulted not only in the hurt of the Franchisee while they operate but also in the hurt of the people who advised them – much like the parents who watch their children drink and drive against their advice.  One can understand the teenager making life decisions like this but it does not explain very well the adults because they are… well…  adults.

One former business owner presented the idea that these people are suffering from Stockholm Syndrome.  Don’t worry, I didn’t know what it was either so here is a pretty good video link that will bring you up to speed.  I believe this person has hit the nail right on the head.

Franchisors (and the courts of law know this) are in a position of power over the Franchisees.  There are no two ways about it and even before signing the Franchise Agreements, everyone knows it.  If the Franchisor turns out to be highly ethical and wants a win-win business relationship you have done well and have obviously been an avid reader of VCSFA articles.  However, if the opposite happens, you are now a captive for the duration of your lease term unless the franchise allows you to take back your retail space and go independent.

We have witnessed, first hand, Franchisees begin to defend their Franchisors even though they had previously acknowledged them as abusive dictators.  Their mental condition began to change as the pressure was put on them by the Franchisor.  They began to think about their seemingly powerless situation and feel hopeless against their new Goliath.  They began to have thoughts that perhaps if they tried to work with the Franchisor amicably that their hostile environment would somehow turn out less hostile and they would have a better chance of coming out unscathed – both legally and financially.

From the non-business owner and former Franchisee’s perspective, this kind of behaviour is akin to the nice girl who insists on staying in the abusive relationship.  No matter what counsellor or agency you refer her to, she insists that she will be able to change this abusive man and that somehow things will get better and one day she won’t wake up with black and blue eyes.  In both situations, what they haven’t considered is that a man cannot change another man’s heart.  Whether it’s a corporation or an individual, a change must occur in the heart for outward change to manifest.

So how do you know which chain is oppressive and captor-like?  You will know them by their fruit. No good seed from a good tree will produce bad fruit and conversely no bad seed from a bad tree can produce good fruit. In a franchise environment, the individual Franchisees and their locations are the fruit.

No good seed from a good tree will produce bad fruit and conversely no bad seed from a bad tree can produce good fruit. In a franchise environment, the individual Franchisees and their locations are the fruit.

 

Need some advice? Considering signing up with a franchise?  We are here to help.  Shoot us an email at info@vcsfa.ca

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.

Checklist to Evaluate a Potential Franchise with bonus VCSFA commentary

Thank you very much to our member who found this article on The Business Link website and recommended that we share it.  Indeed it is a great article and worthy of some VCSFA commentary.

It is likely a fearful thing to many franchisors that potential buyers would obtain this list and actually start asking these questions.  For many of them it would likely mean the beginning of the end of their reign of folly while for the solid ones further credibility and free word-of-mouth marketing to other potential buyers.

While all of these questions are worth finding the answers to, there are some that need further expansion.

  • Is there a franchisee association or council? Who belongs?

Comment: This is the most important question you need to answer.  All the rest of the answers can be found and worked through if there is an FAC.  If you don’t know what this is or need help starting one, we at the VCSFA are here to help.  Read this article for starters.

  • How many years has the franchisor been operating?

Comment: Do not be deceived into believing that just because an organization has been franchising for a long time and has many stores that it is healthy.  Just because a hamburger chain has thousands of locations doesn’t make the burgers healthy. It may have at one time been good and now rotten.  Do your homework.

  • How many units are corporately owned?

Comment: How many of them are there, why are they owned by corporate and if they were at one time owned by corporate or are currently, what happened to the previous franchisee?  Note that you probably want to look in much more detail at a store that has been owned by corporate especially if you find out that a previous owner just ‘disappeared’ – and they do – regularly.

  • What is the franchisor’s financial condition? Have you received its most recent audited financial statements?
  • Will the franchisor provide franchisees with a statement of the disposition advertising funds?

Comment: The VCSFA members and directors will all eat their hats if a coffee shop franchisor will provide you with this information.  They typically do not open their books even to their ‘franchise partners’.  We wish you all the best of luck with this one and please email us if they do this and we will give them front page advertising on our site for a week and all the directors can swing by for a free latte at member locations!

  • Is the franchisor a member of the Canadian Franchise Association?

Comment: You can find the search field here to check.  To our surprise we found one major Vancouver coffee shop franchisor in this list that we didn’t expect to find while its major competitor was not.  Membership in these kind of associations is a good indication but we now know that it is not a totally reliable guage.

  • Has the franchisor litigated with franchisees previously? What was the outcome of such litigation?
  • Is there any pending litigation against the franchisor? What is the nature of such litigation? The status? The likely outcome of the litigation?

Comment: You can learn how to get some fast information by reading this previous article called “Does your Franchisor Hang out at the Supreme Court” and this CANLII tool (We’ll do a separate article on this beauty soon!).  To our surprise, the big Vancouver coffee player that was a member of the Canadian Franchise Association was quite readily found in court while its competitor was not a CFA member yet absent from court documents.  Just do your own homework and consult the VCSFA for any help you need.

  • Does the franchisor have a recognition program for exceptional performance? What does it involve?

Comment: The only recognition most franchisees want is money so we would recommend asking ‘Who’s makin’ money here?” instead.

  • Does the franchisor have plans for expansion or diversification? What effect will these plans have on your dealings with the franchisor?

Comment: Very important.  We have heard rumours of one Vancouver coffee shop franchisor who is starting to consider opening tea shops.  Where will that tea come from?  Will it compete against the tea sold in their coffee franchises?  Will they merchandise it at grocery stores taking away sales from franchisees?  These questions are relevant especially in the coffee shop industry during a tough economy.

  • Has the franchisor introduced any innovations since it began its business?

Comment: Think of Research in Motion (RIM). You can only ride on the success of your past for so long.  This is a fact, not opinion.  You need not only look at whether a coffee shop franchise has launched innovative new products but also – and maybe especially so – whether they have done any creative marketing.  Or are they just doing the same ol’ same ol’ (ie. contra advertising in the free paper and event sponsorship? We would also recommend adding a further question to this “Do these innovations help the franchisor and hurt the franchisee?”  Some ‘innovations’ are merely created to create more revenue for the franchisor at the expense of the franchisee.

  •  Is your franchise territory exclusive? If not exclusive, is there any territorial protection? Will there be other outlets opening near your territory? Does the franchisor sell its products through other channels? If so, what are these channels? How will they impact on the profitability of the franchise?

Comment: As touched upon above, be careful that the franchisor is not in the middle of diluting the brand with similar businesses or distribution channels.  As mentioned, there is one Vancouver coffee shop franchisor that is rumoured to be in the middle of opening a tea shop (or more).  This is a definitely ‘similar business’ – in fact that’s the terminology used in the franchisor’s contract with franchisee in the non-compete section.  Make sure your franchisor is not planning to compete with you in the same way that you agree not to compete with them!

  •   Questions to Ask Current Franchisees

Comment: This ENTIRE section is worth reading.  If you can get the current franchisee to open up about these questions, you’ll learn a lot – probably too much.  Don’t expect perfection from any franchisor, but it’s reasonable to expect reasonable.  Reasonable is reasonable.

  • The Contract

Comment:  This section is also important to completely read and understand.  The contract is the ‘heart of the franchisor’.  You can learn a lot about their past as well as their future plans via the franchisee agreement.  One question I did not see listed which has caused enormous amount of pain for Vancouver coffee shop franchisees is “Do I have to renovate?  When?  How much will it cost? What are the details?”  If the answers are vague, run away.  Run fast.