Franchise Regulator in Ontario
"They wanted a regulator to review the quality of disclosure given to franchisees, an inexpensive system to resolve disputes, rules to govern contractual relationships and penalties for breaking franchise law."We support this bill, but on the clear understanding that this is only the first step and not the last step towards franchise legislation," Municipal Affairs Minister John Gerretsen said in the Legislature May 17, 2000.
Toronto franchise lawyer Ben Hanuka, chairman of the joint subcommittee on franchising for the Ontario Bar Association, says he thinks it's about time the Liberals brought forward new legislation.
Some franchisors are not giving adequate disclosure, and franchisees who have already invested a life's savings at the age of 40 or 50 are having to spend $50,000 to $100,000 to enforce their rights under franchise law to rescind their contracts and recover payments. In some cases, the franchisor will not have the money to refund payments, or to compensate the franchisee for his legal costs to win a judgment.
"When a franchisee files a notice of rescission, the franchisor says: `Sue me'," Hanuka said. "If the franchisor is bad enough not to give you a disclosure document to begin with, most likely he will not refund the money,'' as we have seen with 3 for 1 Pizza & Wings (Canada) Inc. and Pizza One Group Inc.
The Toronto Star reported this week that former franchisees are waiting to collect about $1.1 million in court awards, plus legal costs and interest, from Reza (Anthony) Solhi of Richmond Hill, his former 3 for 1 Pizza franchise chain and related companies.
Meanwhile, Solhi and his family are facing a new string of lawsuits and default judgments and a police investigation at Pizza One, the first of three new franchise operations they have marketed from offices in Thornhill since 2004."
Would a regulator have helped Solhi and his family?
Well, no, no and maybe.
Here is a summary of what I believe about prospective franchisees and business opportunties investors and their due diligence.
1. Nobody pays for bad news: due diligence from a lawyer, government agency or other agency is designed to produce bad news about a franchise opportunity. Anyone that skeptical about the opportunity doesn't need to pay for the information. The person that needs the information won't pay
for it. This a psychological truth that is well known to franchise lawyers.
2. The cost of serious due diligence on a franchise is about $3000 - $3500, out of the reach for the ordinary franchisee. But this is affordable if 10 or more prospective franchisees wanted the same due diligence.
3. A large part of the high cost of due diligence is: a) the unavailability of the franchisor's disclosure documents, unlike for example in Calforinia where there is a free public accessible site to review UFOC's, b) franchisees looking for confirmation of their views, see for example the many posts on the franchise-chat forum after they are hooked on the concept, and c) the relative inexperience of most general lawyers to adequately review a franchise agreement.
In conclusion, prospective franchisees will be better served if
a) the cost of serious due diligence on a franchise was equivalent to the cost of a home inspection -a loss you could walk away from- and;
b) the general bar could afford the equivalent of title insurance when reviewing a franchise agreement for their client - a standardized list of what could go wrong in the contract, such as the American Association of Franchisees and Dealers Fair Franchising Standards, which can be accessed
here.
Finally, what should be the role of the both the provincial and federal government? No regulator can provide a substitute for individual due diligence and it is folly to believe otherwise. None of the active state securities regulators on franchise opportunities believe that they are substituting their skill for individual due diligence.
But, one step that the either government could undertake, with no changes to either the Franchise Disclosure Act or the Competition Act, would be to monitor franchise and business opportunities trade shows to see that the participants actually have a real disclosure document. The State of Florida routinely does this with trade shows in Florida; trade show promoters may be liable for misleading advertising otherwise.
