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Executive Summary

During her career, Cheryl Bachelder had been a senior executive at two other food franchising companies, Domino's and KFC, and she'd learned to love the model. But when she took office at Popeyes, in 2007, which was struggling from a lack of strategy and too much short-term thinking, she found that the company's relationship with its franchisees was severely strained. As she and her team worked to turn Popeyes around, they would have to both regain the owners' trust and fire up their enthusiasm for the future. They would also have to create an arsenal of brand-building ideas and a national advertising campaign to build consumer awareness.

In talks about how they should lead and which stakeholders should be their primary focus, the team members settled on a model called "servant leadership," in which the people of an enterprise come before self-interest. And they agreed that Popeyes franchisees should be their most important customers: "No one," Bachelder writes, "has more skin in the game." The company conducted its first in a series of franchisee satisfaction surveys and began measuring what matters most to owners, namely restaurant-level profitability. It launched a number of winning new products and acquired sophisticated software to help franchisees choose the best locations for new restaurants. The result has been eight years of steady growth.

My first official day as CEO of Popeyes Louisiana Kitchen was November 1, 2007, but the company was holding a big franchisee meeting in Orlando a few days earlier. I wasn't technically an employee yet, but I decided to attend and make a presentation. My hope was to inspire the entrepreneurs who own and operate Popeyes restaurants about the bright future of the brand. In retrospect, I was naive and overly optimistic.

The company had gone through four CEOs in seven years, and sales had been choppy throughout that period. The meeting made it crystal clear that the relationship between Popeyes and its franchisees was strained. One conversation in particular stands out in my mind: A veteran franchisee, a 68-year-old man from Texas, said, "Miss Cheryl, don't expect us to trust you anytime soon. We're like abused foster children, and you're just a new foster parent." It was a humbling moment. I realized that until we demonstrated some value to our owners, it was unrealistic to expect their enthusiasm for the future.

Popeyes is the third food franchising company at which I've been a senior executive, and I've fallen in love with the business model. From a strategic point of view, it's asset-light, has a reliable cash flow, and expands a brand by leveraging entrepreneurs' capital and operating expertise. But what I really love is the opportunity to work with the passionate, talented entrepreneurs who own and operate the restaurants. They're buying into the brand in a way that traditional employees don't. They've made a huge investment of money and time. Being a franchisee isn't a job you can quit-it's your life.

At the same time, this business model often results in conflict between franchisees and the parent company, particularly if they aren't aligned on how to grow the business. To try to turn Popeyes around, my team and I decided to focus intently on the franchisees rather than other stakeholders. We decided to measure our success by their success. Nine years later, our results have improved dramatically-and while our relationship with them isn't perfect, it is remarkably better than at that 2007 meeting in Orlando.

From P&G to KFC

After graduating from Indiana University's MBA program in 1978, I started out in brand management at Procter & Gamble, moved to Gillette, and then joined Nabisco, where I managed snack and candy brands for seven years. My restaurant experience began in 1995, when Tom Monaghan, the founder of Domino's Pizza, hired me to run marketing and product development. I had no idea that Domino's was having problems with its franchisees, who filed a lawsuit against the company during my first week on the job. The owners claimed that Domino's was unfairly profiting from the dough and other supplies it sold to its franchisees. To settle the lawsuit, the management team created an audited, transparent system for the supply business and agreed to share any profits above a certain threshold with franchisees. Meanwhile, I set out to create an advisory group of owners who weren't involved in the lawsuit to find new ways to gain franchisee alignment and drive the growth of Domino's business. One of our biggest accomplishments was the launch of an innovation to keep pizzas hot during delivery: heated plates inside insulated bags, named Domino's HeatWave bags.

Shortly after Domino's was sold to Bain Capital, I was recruited to become president and chief concept officer at KFC, a division of Yum! Brands. KFC had been struggling, and its franchisees, too, were unhappy. Their contracts with KFC gave them much more power than in most franchise models; my assignment was to align the owners on a plan to grow the chicken business.

In my 30 months at KFC, we had 16 months of positive sales and 14 months of negative ones. We couldn't turn the corner fast enough to please the CEO, the board, or the shareholders, so I was fired in the fall of 2003. The most important lesson I took away from that experience is that you cannot serve the people or the enterprise well without delivering strong results.

When I left KFC, I decided to take a break. My children were then teenagers, and my husband was a management consultant who traveled frequently. After years of being a leader at the office, I decided our family needed my leadership skills at home. During that time I did some consulting and joined boards, including the hardware chain True Value's. Then, in 2006, I joined the board of Popeyes. I knew the company well, because I'd competed against it when I was at KFC. I had no idea I would someday become its CEO, but serving as a director turned out to be the perfect way to get a sense of the company's challenges and opportunities.

"Servant Leadership"

Popeyes was founded in 1972 in Baton Rouge, Louisiana, by Al Copeland, who was what we would now call a foodie. People tell stories about Al's passion for the recipes-how he'd stay up all night to perfect his mashed potatoes. Popeyes is called a fast-food restaurant, but it's known for slow-cooked foods and complex flavors. We use fresh bone-in chicken and marinate it for 12 hours before cooking. We've built a competitive advantage around the food. The company went public in 2001, and today we're in 48 states and 26 countries. We have 71 company-owned stores, but most of our 2,569 locations are owned by our 360 franchisees. The company receives a percentage of franchise sales, and it profits from development fees when new restaurants open.

In 2007 Popeyes was struggling for several reasons, including a lack of strategy and too much short-term thinking. Very little consideration had been given to new-product innovation. We had no arsenal of brand-building ideas. We also had no national advertising, so consumer awareness was low. Those problems, along with poor financial results, created an angry and frustrated group of franchisees. At one point some of them showed up uninvited to a Popeyes board meeting to demand changes. After the CEO resigned, I was asked to serve on the board search committee to hire a replacement. We offered the job to two candidates, but both turned it down. When the board asked me to step in as CEO, I knew it would be a difficult assignment. I also knew that it was in my sweet spot: a turnaround of a franchise-based enterprise.

After the contentious Orlando meeting, the leadership team convened in Atlanta to create a business plan. We also took a day to explore what kind of leaders we wanted to be. We made lists of our best bosses and worst bosses and described what made them good or bad. (The "worst" list was much longer.) The conversation led us to a model called servant leadership, in which leaders put the people of the enterprise above self-interest.

Then we talked about the company's various stakeholders: guests, shareholders, franchisees, employees, directors, suppliers. The main question was, Which group would be our top priority? The CFO argued for shareholders, and he had a point-the stock had dropped from $34 to $14. We also discussed our guests. Many of us had worked for franchised food companies that prioritize guests first, and we'd seen how that can go wrong. Some chains try to legislate their way to better customer service by creating rules that must be followed. (For instance, the restrooms must be cleaned every 30 minutes.) But a number of intermediaries separate a chain's corporate headquarters from the customer in line at a quick-serve restaurant-the franchisee, the general manager, the shift supervisor, the restaurant team member. Unless all of them work together, the effort will certainly break down. At one point in my career, I was touring restaurants to talk to team members about the importance of serving guests well. I met a young man who was not excited about my "lesson." He asked who I was. "I'm Cheryl," I said. "Well, Cheryl," he said, "there's no place for me to hang up my coat in this restaurant, and until you think I'm important enough to have a hook where I can hang up my coat, I can't get excited about your new guest-experience program." It was a crucial reminder that we are in service to others-they are not in service to us.

The more my team and I talked about it, the more we saw the franchisees as our primary customers. They have mortgaged their homes or taken out large loans to open restaurants. They have signed 20-year agreements. No one has more skin in the game-they have no plan B. If we use our influence on the franchisee, he can bring his influence to bear on the restaurant manager and the frontline team members. To get a benchmark, we conducted our first franchisee satisfaction survey. We also began focusing on the metric that matters most to owners, which is restaurant-level profitability. Franchisees depend on those profits for their income and for the cash flow to open new locations. We hadn't even been measuring that number, but we began tracking it closely.

A Big Ask

Early on, we called a meeting of our vice presidents and directors and discussed a range of issues facing Popeyes, such as the speed of our drive-through windows (which was poor). We did that classic exercise in which everyone puts a Post-it note on the problem he or she thinks should be solved first. The most revealing moment came when someone named Sondra, who'd worked at Popeyes for more than 20 years, said, "We put these problems on the wall every year, but nothing ever changes." I was initially shocked, but I appreciated her candor. It was a reminder of the energy wasted in corporate America while people focus on work that isn't producing results. Even CEOs shy away from hard things-they worry about getting the board aligned, or finding the money to pay for a project. I told Sondra that we wanted to be the group that finally fixed problems-not all of them, but the few on which we could focus to make the most impact. We ended up listing seven priorities on our strategic road map, and in the end we accomplished only three of them-but we did them brilliantly.

The pivotal moment in the turnaround came when we tried to sell our business plan to the franchisees. We met 10 franchise leaders in a windowless hotel conference room in Chicago. At that time, all Popeyes advertising was controlled locally, and each franchisee contributed 3% of sales to pay for ads. Our plan called for increasing that number to 4% and creating a national ad campaign, to coordinate the brand message and drive awareness. We brought in an outside expert who described the chain as being at an inflection point: The time was right to make the move from local to national advertising. The franchisees asked us to sit in the hallway while they debated the idea. When we came back in, they said they'd agree-if the company would invest $6 million to increase the number of weeks of advertising. That was a big ask. It would require board approval and would lower our earnings, disappointing Wall Street. But it was essential to gaining systemwide franchise alignment. We committed the dollars and saw it through, even when the economy went into recession in the fall of 2008. National advertising was the first critical step in driving the Popeyes turnaround.

We made some missteps along the way. We introduced some value-oriented items, including a mini chicken tortilla wrap, and people traded down to the cheaper choices, lowering the average check. But we kept at it, we found some winning new products, and sales and profitability began to improve. We developed a cadence for new-product launches. We began using sophisticated software to help franchisees choose the best locations for new restaurants, dramatically increasing their success rates. Our market share grew from the teens to the mid-20s. We attracted franchisees who owned other fast-food restaurants and wanted to open a Popeyes. A third of our stores have been built in the past five years. We're opening more than 200 global locations a year, which puts us in the top tier of quick-service restaurants. We've had eight years of success-an unusual streak of steady growth in our industry.

An Act of Stewardship

Although our numbers got better, the franchisees' trust in us didn't improve as much as I had hoped. Franchisees have elephants' memories. As the turnaround took hold, we had some meetings with owners that required outside facilitators to keep everyone calm; the two sides would be in opposite corners, as if in a boxing ring, with arms folded across their chests. In franchising you're only as good as yesterday's results-there is no emotional bank account into which you can make deposits. It feels unfair sometimes, but it's our job to keep modeling and earning trust.

Despite that complicated dynamic, I believe deeply in the franchise model. Starting a business from scratch is very risky, and franchising allows people to invest in a proven brand, reducing that risk. It lets them pursue the American dream: 40% of Popeyes franchisees in the U.S. are first-generation immigrants. Franchising is at the heart of a thriving economy, because it lowers risk for start-ups and creates a large number of entry-level and management jobs. One-quarter of Americans say their first job was in a restaurant-often a fast-food franchise.

The Popeyes turnaround has become a case study in what happens when leaders think about serving others-in this case, our franchisees. Leadership is an act of stewardship, not a practice that's solely for your personal benefit. The test of our leadership is simple: Are the people entrusted to our care better off? That lesson is not discussed much in business schools, and it's not the model that many leaders of my generation have demonstrated. In fact, a lot of Baby Boomers are too concerned about their own résumés, their wealth, and their next job. Instead, we need to be teaching young leaders how to serve -as a path to generating superior results. I'm excited about that opportunity. Today young leaders are more purposeful and intentional than my generation, and they're hungry for a new model of leadership that will make a positive difference in the world.

A version of this article appeared in the October 2016 issue (pp.33-36) of Harvard Business Review.

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The CEO of Popeyes on Treating Franchisees as the Most Important Customers

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Executive Summary During her career, Cheryl Bachelder had been a senior executive at two other food franchising companies, Domino's and KFC, and she'd learned to love the model. But when she took office at Popeyes, in 2007, which was struggling from a lack of strategy and too much short-term thinking, she found that the company's relationship with its franchisees was severely strained.

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http://www.forbes.com/sites/quora/2012/12/20/whats-the-secret-to-a-successful-coffee-shop/#37bf91246d37

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Having detailed an answer to Why do most café startups fail?, I guess it is only fair that I also provide an answer to the question about why some succeed.

There is no one secret to a successful coffee shop; in fact, most secrets in business boil down to either hard work, extensive experience, or luck or a combination of all three. I have taken success for this post to mean financially sustainable with an appropriate ROI for the owner, which means not necessarily giving the customer everything they would wish for.

I have established and managed more than fifteen coffee shops with varying degrees of success. While there may be hundreds of reasons why a coffee shop might succeed (including luck), here are the ones that I pursued in Australia that lead to successful outcomes for me.

1. Consistently serving the finest espresso - It is rare in business to discover a product where consistently offering 100% quality is the best commercial decision you can make. In fact, I am the greatest advocate for the 80% is perfect model. But espresso coffee is one of those rare products where consistent 100% quality matters. Customers will walk past ten other competitors to get the best espresso, which is why this factor alone means you don't need the highly visible, most expensive location. So buy the best espresso coffee machine (3/4 group Italian made with e61 groupheads and set to the right pump and temperature levels), install it with a water purifier and demineralizer, use a conical grinder, and only buy top quality Arabica or Arabica 90%/Robusta 10% freshly roasted beans, and make sure every cup is made by a fully trained barista who is continually seeking the 'god shot.'

2. Ergonomics is vital - Make sure the coffee workstation and layout is such that the barista hardly moves their feet in performing all their coffee making duties, and they are not competing for the space with other staff members. High volume coffee sales are the foundation stone of every coffee shop, so make sure this workstation is perfectly laid out with easy access to underneath bins, bean storage, and bar fridge milk, having the right height benchtop with easy access to cups, grinder, accessories, and reachable overhead storage of supplies. The best setups also have a small inbuilt sink to allow for quick and easy ongoing cleaning. Also, place the cash register on the front counter in close proximity to the barista's workstation. This allows the barista to hear the customer orders and get a head start on making them in the busy times, while allowing the barista to work alone in an efficient way in the very slow times.

3. Use loyalty cards - I resisted using these for a long time ... but they really do work. Make sure it is a quality card that will last the wear and tear and look good in a customer's wallet. Nothing better than seeing a new customer's face light up when you give them a buy seven get the eighth one free loyalty card, but tick off six of them so that on their very next purchase they get a free one. Cheapest customer acquisition ever.

4. Promote multiple sales - A coffee shop will never make enough money to pay the bills from coffee sales alone. Coffee may be the prime motivator for customers coming to the business, but they must leave with multiple sales if you are going to be successful. As a target, coffee should be no more than 40% of your weekly sales and two item sales per customer transaction means you are getting it about right. So make sure the traditional coffee accompaniments (muffins, cookies, cakes) are close by at the point of sale, and the coffee shop offers cold food, cold drinks, and hot food to ensure the best chance of multiple sales.

5. Limit the assortment - Many newbies in the coffee shop game think that wide assortments and extensive product offers are a key competitive advantage. They forget that the customer is simply hungry or thirsty or both, and that a wide choice for most people creates anguish. So cover the necessary categories, but with limited and strategic offers. (e.g. three flavors are enough, three sizes are enough, three types of food/drink are enough). Every item you add to the assortment creates many multiples of management effort (costs) and mostly without adding anything to the revenue streams or customer experience.

6. Merchandise your margins - Price according to perceived customer value, not according to accounting determined markups. For some well known items you will need to be at (coffee) or even below market price (coke can), and this loss should be made up with high margins on other items that are exclusive to you or in the 'don't-care and addictive' mindset of your customers. So don't add a blanket markup to your entire assortment, but price line by line according to customer expectations and what the market will bear.

7. Get your beachhead strategies right - Getting traction in a competitive marketplace like coffee shops is vital, and you will need to have a clear understanding of how to get customers to initially give you a go and a plan for keeping them returning and referring you to their friends. This is a whole other topic that I have now written about here ... What are some Biz Dev best practices for startups?.

8. Counter service - Counter service is the cheapest most efficient and effective service system for a coffee shop, and it is now fully accepted by customers, thanks to the global success of McDonalds. Counter service is hassle free for both you and your customer, and it significantly reduces your wages bill. So get the customers to order and pay upfront, give them a number on a stand with their drinks, and deliver the food or better still give them a buzzer that calls them up to the counter when the food is ready. Counter service means that you can handle the peak demands that occur in coffee shops at breakfast and lunch, and it is a lot less stressful on everyone, ensuring the friendly banter can remain an important part of your offer.

9. Pre-make as much as possible - Custom-made assortments assume that the customers know precisely what they want. They don't. Customers see you as the expert and are hoping that you will suggest to them what combination of food/drinks they should be trying. In a coffee shop context, I found it best to pre-make the food and leave the custom making to the coffee. Custom food is also a high cost option for you because you can't get the economies of scale making-to-order, and it limits your turnover in those peak periods where you should be busy pumping out the sales as quickly as possible, not spending the time making custom orders.

10. Understand what you are really selling - Too many businesses, including coffee shop owners, don't fully understand the need they are really satisfying for their customers, and so they often concentrate on the wrong parts of their offer. Customers frequent a coffee shop for many more reasons than just hunger and thirst. There is the escape from a stressful office, the chance to maintain or grow a relationship, a place to get away to do some reflective work, a chance to engage with familiar coffee shop staff at a particularly lonely time, or as a place to do business and reach an agreement. Understanding the needs you are really catering to will help you better construct your offer and make decisions that keep your customers returning and so maintaining the coffee shop's success.

11. - I know all your friends will tell you to get comfortable lounges, free Wi-Fi, table service, and lots of in-house entertainment ... but customers sitting on one cup of coffee for hours enjoying all these benefits won't pay your rent. My most financially successful coffee shops had a limited number of not-so-comfortable bench & bar stools to make the coffee shop look lived in and loved, but I concentrated on building the takeaway business. Takeaway customers pay the same price as the sit-down customer, but without any of the occupancy costs, and you will serve ten of them by the time your sit down customer has finished sipping on their first cup of coffee as they enjoy a chat with their friends on using your free Wi-Fi.

12. Serve on the front line - Coffee shops, like restaurants, are much more a people/service business than they are a goods/transactional one. While a goods/transactional business can still succeed with a non-present owner, a coffee shop needs the owner's care, attention, and engagement. Customers expect it, and staff are far more enlivened when the owner in on hand taking orders or making coffee or is generally hovering in active care of the business.

Probably worth mentioning why I haven't included high traffic location on the list. The reason is that it doesn't necessarily work for coffee. Sure, you have to be located in the area where there are a sufficient number of people, but you don't need the high traffic location in that area. For a start, it will carry the most expensive rent, secondly you will be competing for that space with A1 tenants (Banks, telcos, fashion houses, franchise chains), making it near impossible to get as a stand alone coffee shop business anyway and thirdly, high traffic dose not always translate into high turnover for coffee. I made that mistake once, failing to realize that coffee is a destination rather than an impulse purchase and too much traffic can mean that people are more focused on getting somewhere else rather than stopping to enjoy your offer. Believe me, my #1 will overcome the need to get that high traffic location, and the lower rent will make your coffee shop far more financially sustainable and successful.

This is not an exhaustive list but it will give you some ideas on what you should be considering if you want to build a successful coffee shop. See also What is it like to own/run a coffee shop?, which provides further insights into the coffee shop business.

...

1. Passionate people who start it because they are passionate and talented with coffee, not because they want to start a business.

2. Product that tastes better than any other nearby.

3. Don't act like you're in the coffee business. When you're in Retail, you're in the people business.

A lot of the other things usually take care of themselves.
This question originally appeared on Quora. More questions on Small Businesses:

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What's The Secret To A Successful Coffee Shop?

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Having detailed an answer to Why do most café startups fail?, I guess it is only fair that I also provide an answer to the question about why some succeed. There is no one secret to a successful coffee shop; in fact, most secrets in business boil down to either hard work, extensive experience, or luck or a combination of all three.

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TORONTO -- Millennials with an entrepreneurial bent are choosing franchises as an opportunity to learn the fundamentals of business without having to reinvent the wheel.

Jose Miguel Aguila was just 24 when he opened his first Booster Juice location in a Toronto suburb as a franchisee. Now 27, he own three locations across the Greater Toronto Area.

Aguila said he wanted to put his accounting degree to work and get a taste of the business world with a proven concept.

"You've got sales from Day 1," he said.

Aguila said his family and friends, especially his fellow students in the normally conservative world of accounting, were surprised that he was taking such a big risk when he first announced his intention to buy a franchise.

He funded the $250,000 in start-up costs for his first outlet with a bank loan, which he says took a lot of convincing despite his solid business plan.

"It was a very easy road for me to become an accountant with a good salary and job security," he said. "But I chose to do something that would give me a little bit more freedom and the opportunity to multiply my income."

Lorraine McLachlan, president of the Canadian Franchise Association, said entrepreneurial role models like Mark Zuckerberg give millennials more confidence in taking the first step.

"They see opportunities that their parents or Generation X might not have realized were there, and they're less afraid to try to go ahead," she said.

One of the hardest things for many entrepreneurs of any age is coming up with a great idea or product, she said, and buying into an existing idea can be much simpler.

"It provides a blueprint for the business," she said.

The franchise industry -- including fast-food purveyors such as Tim Hortons and McDonald's, as well as other retail services like Remax and H&R Block -- gives a $68-billion-a-year injection to the Canadian economy, according to the CFA.

Lawyer Tony Wilson, who wrote a book on buying a franchise in Canada, said investing "sweat equity" in a franchise business can be an alternative for young graduates facing a tough job market.

"To some extent, you're buying yourself a job," he said.

Contract and short-term employment is much more common than full-time work for those under 35, and the number of contract workers has grown more than four times faster than the number of full-time employees since 2008, according to Statistics Canada.

But Wilson sounded a word of caution to millennials pondering entering the franchising world.

He noted they're known for being out-of-the-box thinkers, and he cautioned that strong-willed young people with ideas of radical change may find the traditional business model dictated by a franchise agreement too binding.

"A huge American company with 3,000 units around the world is not going to make too many changes to their franchise agreement just for you," he said. "It's going to be their way or the highway."

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Millennials turn to franchises for business opportunities

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TORONTO -- Millennials with an entrepreneurial bent are choosing franchises as an opportunity to learn the fundamentals of business without having to reinvent the wheel. Jose Miguel Aguila was just 24 when he opened his first Booster Juice location in a Toronto suburb as a franchisee.

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Cara Operations Ltd., the largest Canadian-owned restaurant company, welcomed Quebec's rotisserie chicken chain St-Hubert Group to its table Thursday, securing both a beloved brand and access to an important market.

Vaughan, Ont.-based Cara will take on 117 restaurants in a $537-million deal that accelerates its expansion into a province where it has scarcely had a presence and taps into a loyal customer base that not only comes out to eat, but also buys its secret sauces and frozen entrées in the grocery store.

Cara's big brands, such as Swiss Chalet, Harvey's and Milestones, already span the country, and once Laval, Que.-based St-Hubert is folded in, it will oversee 1,127 restaurants. Only Tim Hortons' owner Restaurant Brands International Inc. and McDonald's Corp. have a larger market share. And Cara's management sees plenty of runway for more of its brands to find a home in Quebec.

"This is about growth for St-Hubert and is about growth for Cara," Bill Gregson, chief executive officer of Cara, said on a call with analysts. The company acknowledged that at 12 times adjusted earnings before interest, taxes, depreciation and amortization, the price is richer than what it has paid in the past for other assets. But this was the deal that Cara had in its sightlines for years - a perfect fit in its stable of family-friendly dining establishments.

Cara's Swiss Chalet and St-Hubert fit together naturally, thanks to franchise-focused concepts that largely serve separate markets. St-Hubert has expanded primarily through Quebec, with a few locations on the East Coast and in Ontario. Swiss Chalet has built up a presence as far west as Vancouver Island.

Aside from chicken, Cara was drawn to St-Hubert's connection to grocery stores, such as Sobeys, Loblaws and Costco, selling frozen versions of its classic dishes, side salads and soup, among other signature offerings. Mr. Gregson said St-Hubert had pioneered converting restaurant brands into products that can be sold in grocery stores and he hopes the addition of the Quebec company will enable Cara to be better at that.

St-Hubert also has a portfolio of real estate, including two food manufacturing plants and two distribution centres in Quebec that have the ability to increase their capacity. St-Hubert's management team is now set to develop and expand a line of Cara-branded products that can be sold to retail shoppers. These would be manufactured in Quebec and sold across Canada through existing St-Hubert suppliers.

Perhaps more importantly, Cara gets that which can rarely be bought: A deep pool of emotional capital that comes from 65 years of consumer loyalty.

Started by Hélène and René Léger in 1951 on St-Hubert Street in Montreal, the franchise chicken chain is so ubiquitous in its home province that its 1960s jingle is still recognizable to most Quebeckers. Its restaurants are community gathering places.

As Eric Blais of strategic marketing firm Headspace Marketing Inc. puts it, St-Hubert's secret sauce goes far beyond the actual sauce, famed chicken and creamy coleslaw.

"Drive through any small town across Quebec and you'll see a church, a caisse populaire [credit union] and a St-Hubert," Mr. Blais said. "You'll also see a busy Tim Hortons. They're local and, like Cheers, everyone knows your name."

The Légers' son Jean-Pierre took over the business 25 years ago and, now, at aged 70, he is intent on securing his company's place within Quebec culture. After he concluded that his two daughters didn't want to carry on the business, he agonized over what to do.

Mr. Léger said he canvassed potential buyers within Quebec, including institutional investors, such as pension fund manager Caisse de dépôt et placement du Québec and labour fund Fonds de solidarité FTQ. Although they had the means, he said none had the mandate to take over entire companies. Local industry players, meanwhile, were few and far between and he failed to develop a chemistry with them.

"My main concern was to ensure the long-term existence of the company," Mr. Léger told reporters who had gathered Thursday at the St-Hubert restaurant beside Montreal's Bell Centre, adding that the business employs 10,000 people.

Over the past several years, Fairfax Financial Holdings Ltd.'s founder and CEO Prem Watsa grew close to Mr. Léger and sought to reassure him that Cara would take good care of St-Hubert if he were to sell it. Fairfax has been a key investor in Cara and is now Cara's largest shareholder, primarily through multiple voting shares.

Mr. Watsa has a Warren Buffett-like mantra to never sell the business he buys, as well as experience with family-owned operations - Cara's Phelan familyhas been involved in the business since it's founding in 1883.

"Jean-Pierre always told us, if he decided to sell, when he decided to sell, he would sell it to us," he said.

It will take years, but Mr. Watsa believes Cara will one day bring the flavours of the provinces abroad. "Long term, we could expand in many countries in the world."
With a file from reporter Marina Strauss in Toronto.

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Cara gobbles up Quebec's St-Hubert chicken chain for $537-million

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Cara Operations Ltd., the largest Canadian-owned restaurant company, welcomed Quebec's rotisserie chicken chain St-Hubert Group to its table Thursday, securing both a beloved brand and access to an important market.

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In midtown Manhattan, 48Lex towers over the crowded street at its feet. The high-rise, luxury hotel offers a singular experience - serving complimentary wine at happy hour - but it's just one of 52 hotels owned by Hersha Hospitality Trust.

The company, named for founder Hasu P. Shah's wife, grew from modest origins. At one of the family's first properties, the 23-room Red Rose Motel in rural Pennsylvania, Shah and his family lived behind the lobby.

"There were a lot of chores to do," remembers Jay H. Shah, Hasu's son and current CEO of the company. "There was a lot of grass to cut. We had to skim the pool every morning."

Now, the Shahs help comprise an impressive statistic: Indian immigrants and their children make up about 1 percent of the U.S. population, but they own roughly half of the motels in the country. And about 70 percent of those motel proprietors can trace their heritage to just one state in India: Gujarat.

In fact, the story of Hasu P. Shah - a former electrical engineer who reinvented himself as an entrepreneur - is common among the Gujarati community, according to Pawan Dhingra, chairman of the sociology department at Tufts University.

"They have a long tradition of working for themselves, rather than someone else," Dhingra says.

But the fact that so many Gujaratis became motel proprietors, in particular, is something of a historical accident. It started with Kanjibhai Desai, an undocumented Gujarati immigrant who bought a motel in San Francisco in the early 1940s.

As Dhingra explains, his example inspired Indians who followed.

"Some of the pioneers stayed at his hotel, where they got the idea of pooling their resources to buy one themselves," he says.

Gujaratis really began buying motels after 1965. That's the year the U.S. government began allowing in more people from developing nations. Now there are nearly 4 million people of Indian descent living here.

"They really did change franchising," says Jan deRoos, who teaches at Cornell's School of Hotel Administration.

He says Gujaratis played a huge role in the expansion of Best Westerns and Days Inns across the country, partly because they were willing to relocate to out-of-the-way places like Canton, Miss., or Plainville, Ohio.

"Every small community in America today has a hotel or two, as a result of this community taking a business risk and establishing a hotel."

Being the only Indian immigrants in these isolated communities could be tough, though.

"It was hard," says Binita Patel, whose parents owned hotels in North Carolina in the 1980s. "I remember someone pulling their window down and yelling, 'Go back to your own country,' as we were walking home."

Yet many Gujarati families stuck it out, and they did innovative things to make their motels profitable. They started the now-common practice of placing a washer and dryer in the room behind the lobby. That way, the person working the front desk at night would have the sheets and towels ready for the next day. They also economized by doing a lot of the upkeep themselves.

Patel and her brother, for example, were in charge of vacuuming her parents' Holiday Inn on the weekends.

"We would vacuum as a team because neither one of us would be strong enough to push the entire vacuum on our own," she recalls.

As she got older she graduated to actually running some of her family's properties. And now, as an adult, Patel wants to take the business to the next level.

She takes inspriation from her friend and fellow second-generation Gujarati, Jay H. Shah. Hersha Hospitality Trust, which began with that modest motel in Pennsylvania, is a now a $2.5 billion company.

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Here To Stay: How Indian-Born Innkeepers Revolutionized America's Motels

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In midtown Manhattan, 48Lex towers over the crowded street at its feet. The high-rise, luxury hotel offers a singular experience - serving complimentary wine at happy hour - but it's just one of 52 hotels owned by Hersha Hospitality Trust. The company, named for founder Hasu P. Shah's wife, grew from modest origins.

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Men in Kilt Experiential Window  Cleaning

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Men in Kilt Experiential Window  Cleaning

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Men In Kilts, Start A Franchise, Window & Gutter Cleaning

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Become a Men In Kilts franchise owner and join the most exciting franchise opportunity in the most overlooked industry in North America CLICK HERE| No Peeking!

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STATEN ISLAND, N.Y. -- Gloria Jean's Coffees at the Staten Island Mall will not (repeat: not) reward their first 100 customers with free coffee on Wednesday, Feb. 3.

A spokeswoman for the company said, "We received late notice that the Staten Island location is not participating in the giveaway." Reasons for opting out were not provided by deadline. It is the only Gloria Jean's operation that is not participating in the deal.

Although with a bit of a drive, Gloria Jean's locations in Elmhurst, at the Queens Center Mall, and Freehold, N.J., at the Freehold Raceway Kiosk, are participating in the giveaway: Select patrons who arrive at the store after 1 p.m. will receive a complimentary 1/4-pound bag of coffee beans.

They are the company's award-winning Ethiopian Yirgacheffe product which took top prize in the 2015 "Golden Bean North American Competition."

The give-away (again, not one for Staten Island) will lead up to a "reveal party" at 4 p.m. where the winner of Gloria Jean's "Free Coffee for a Year" will be announced. The "Free Coffee for a Year" winner will receive an engraved golden coffee tumbler and one free 16 ounce coffee each day for a year.

Gloria Jean Kvetko is the founder of Gloria Jean's and the first store started in Chicago as a small coffee and gift shop. The company, now with 60 locations mainly in malls around the U.S., was purchased in 2014 by Retail Food Group Ltd.

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Update: Staten Island Gloria Jean's opts out of coffee giveaway

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STATEN ISLAND, N.Y. -- Gloria Jean's Coffees at the Staten Island Mall will not (repeat: not) reward their first 100 customers with free coffee on Wednesday, Feb. 3. A spokeswoman for the company said, "We received late notice that the Staten Island location is not participating in the giveaway."

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On January 14, 2016, the Ontario Court of Appeal released its decision in the case of 1250264 Ontario Inc. v. Pet Valu Canada Inc. This was an appeal and cross-appeal by the franchisees and the franchisor from the decision of a motion judge in a class action against Pet Valu relating to volume rebates.

At its core, the appeal had two parts, procedural and substantive, both revolving around the franchisees' allegation that Pet Valu was liable for bad faith conduct as a result of failing to disclose in the pre-sale phase that it allegedly did not have significant purchasing power:

Procedural: Whether the motion judge unduly intervened in the case by essentially helping the franchisees/plaintiffs to add this allegation to the class action common issue, well after the action was certified and the original common issues were defined, to the prejudice of the defendant, Pet Valu.

Substantive: Whether there was merit to the franchisees' allegation that Pet Valu was liable for bad faith conduct as a result of failing to disclose that it allegedly did not have significant purchasing power.

The Court of Appeal decided both issues in the affirmative:

the motion judge unduly intervened in the case and caused prejudice to Pet Valu, and

Pet Valu could not be held liable for bad faith conduct as a result of failing to disclose that it allegedly did not have significant purchasing power.

As a result, the Court dismissed the case in its entirety.

The decision is important for distinguishing between pre-sale disclosure and the duty of good faith which arises in the context of the performance of the franchise agreement, i.e., post-sale when the relationship is already in place. The Court held that breach by a franchisor of a disclosure obligation in the pre-sale phase cannot amount to breach of the obligation of good faith in the performance of the franchise agreement.

However, the decision does not address some important disclosure issues, which I explain further in this article:

1. Whether non-existent volume purchasing power is inherently a material fact (i.e., not that the franchisor receives volume rebates, but to the contrary - that it has no volume purchasing power).

2. Whether there is a difference between disclosure in the pre-contractual phase and disclosure in the renewal phase. The Court distinguished the Country Style case simply on the basis that it involved bad faith conduct in the renewal phase, rather than the pre-sale phase. But it did not address the fact that Country Style, where the same Court of Appeal affirmed a rescission against the franchisor for failing to provide disclosure, albeit in the renewal process - was not simply a bad faith case.

The Court of Appeal did not technically need to address these issues in order to dispose of the appeal, and so these issues are left to be addressed in future cases.
Relevant Procedural History of the Case
The class action was comprised of 150 former franchisees. At the class action certification motion, the original motion judge certified only one major head of claim to proceed by way of a class action - claims relating to volume rebates. The motion judge certified seven common issues.

After the certification motion, Pet Valu brought a motion for summary judgment to dismiss the class action in relation to all seven common issues. A new motion judge took over the case by then. He agreed with Pet Valu that, based on the seven common issues, the action of the franchisees should be dismissed entirely.

However, the new motion judge also suggested to the franchisees that they bring a motion to amend their statement of claim to add an eighth common issue, alleging bad faith conduct by failing to disclose that Pet Valu supposedly did not have major purchasing power.

This issue arose only after the CEO of Pet Valu submitted an affidavit in support of its motion for summary judgment. The motion judge misinterpreted the affidavit, as he himself later wrote, that Pet Valu had little to no purchasing power.

As a result, a new allegation arose that Pet Valu should be liable for bad faith conduct in failing to disclose this fact to the franchisees before they purchased their franchises, as an alleged material fact in the pre-sale disclosure phase.

Interestingly, the motion judge also found that the average franchisee's cost of products was actually about 15% lower then prices available outside the system and that Pet Valu negotiated the best price it could obtain. In other words, Pet Valu did have significant purchasing power.

Ultimately, the motion judge ruled that adding this eighth common issue would be procedurally unfair to Pet Valu, which had defended the case all along based on the original seven common issues. The motion judge held that the case would have otherwise been dismissed with costs on the basis of the existing common issues.

Instead, the motion judge amended one of the existing seven common issues to incorporate into it the gist of what the eighth common issue would have been - the allegation that Pet Valu acted in bad faith in failing to disclose in the pre-sale phase that it did not have significant purchase power.
Procedural Ground of Appeal - Undue Intervention by the Motion Judge
The Court of Appeal held that the motion judge's procedural conduct and decision in the amendment of the common issues was prejudicial to Pet Valu and that its appeal should be allowed and the action dismissed based on this ground alone.Essentially, the reasons were as follows:

The motion judge recast an existing common issue on his own initiative after the completion of the summary judgment motion.

The motion judge did not afford Pet Valu an opportunity to make responding submissions to this new allegation.

But for the amendment, Pet Valu would have been successful on the entire action.

The Court held that a class proceeding motion judge should not, despite his or her important and challenging role in guiding the evolution of the class proceeding, make a suggestion at the conclusion of an otherwise dispositive motion about how the plaintiff might improve its position.
Franchisees' Allegation regarding Pre-Sale Disclosure and Bad Faith
The franchisees claimed that Pet Valu failed to disclose that it did not have significant purchasing power, and that this disclosure failure amounted to breach of its good faith duty under section 3 of the Arthur Wishart Act (Franchise Disclosure), 2000.

In other words, the franchisees claimed breach of both sections 5 (disclosure) and 3 (good faith) as a result of the alleged failure to disclose.

The Court held that disclosure failure in the pre-contractual phase could not lead to breach of the good-faith obligation to enforce the franchise agreement because there was no contract in existence during the pre-sale phase. The disclosure obligation arose before the prospective franchisee became franchisees and before they became parties to the franchise agreement. Since a duty of good faith only arises in the performance of an existing franchise agreement, no such duty exists before the sale.
Critique and Analysis: Important Principles Remain Unanswered
The motion judge ruled that non-existent volume discounts constituted a material fact under the Act. The Court of Appeal chose not to deal with this discrete issue and so it remains open.

In my opinion, there is no basis for a court in a future case to find that, all things being equal, this may amount to a material fact. Such an allegation is inherently based on reverse logic: it implies as a starting point that a franchisor is presumed to receive volume rebates, and that absent disclosure to the contrary, a reasonable prospective franchisee assumes so in the normal course.

A more fundamental issue that was not fully developed is the difference between disclosure in the pre-sale and renewal phases.

The Court distinguished the decisions in Salah v. Timothy's Coffees of the World Inc. and 1159607 Ontario Inc. v. Country Style Food Services Inc. (the author acted as counsel for the plaintiff in the Country Style decision) as cases of bad faith, involving deliberate nondisclosure about the status of the lease in the context of renewal. In other words, the Court characterized Salahand Country Style as bad faith cases arising squarely in the context of the "performance" of the franchise agreement - not in the pre-sale phase.

In my opinion, this is correct but does not tell the full picture. The Salah and Country Style are certainly premised on a fundamentally different factual basis from Pet Valu - a renewal, and therefore an existing contract in place, rather than a pre-sale phase with no existing agreement.

However, the Court did not address the fact that Country Style (but not Salah) does have direct implications to the interplay between disclosure and bad faith. The problem with the Court's characterization of Country Style as purely a bad faith case is that in Country Style (affirmed on appeal to the Court of Appeal) the franchisor was held liable for concealing the lease termination not only as bad faith conduct but also in its renewal disclosure obligations, resulting in disclosure-based rescission damages.

The Court in Pet Valu did recognize the potential for bad faith resulting from nondisclosure, but of a different kind - the one purely arising from obligations under the franchise agreement, not disclosure-based. It touched briefly on the the impact of the 2014 decision of the Supreme Court of Canada in Bhasin v. Hrynew on the duty of good faith in section 3 of the Act. It summarized the good faith duty imposed in Bhasin in one coherent sentence: "a simple requirement not to lie or mislead the other party about one's contractual performance."

In franchising, the Court stated that it was assuming, without deciding, that nondisclosure by a franchisor in the course of the performance or enforcement of the franchise agreement (as distinguished from nondisclosure in the pre-sale phase), could constitute a breach of section 3 of the Act. So, nondisclosure of an important fact in the course of an ongoing franchise relationship under the terms of the franchise agreement may amount to bad faith conduct.

But this principle fails to recognize the renewal disclosure phase under section 5 of the Act. While the Court of Appeal in Pet Valu was correct to find that pre-sale disclosure failure cannot lead to bad faith conduct, it did not acknowledge that the situation in Country Style also involves disclosure failure - albeit in the renewal phase.

In my respectful opinion, the differentiation that the Court of Appeal should have made is that pre-contractual disclosure is fundamentally different from renewal disclosure, and that of course both are governed under the very same disclosure scheme in section 5 of the Act.

In the pre-sale phase, there is no contract in place between the parties, and therefore disclosure failure, however egregious, cannot lead to bad faith conduct. But in the renewal phase, a franchise agreement is in place, and disclosure failure could at the same time result in bad faith conduct, as was held in Country Style.

In a renewal, the continuing obligation on the parties to perform the contract in good faith is on top of, not instead of, the obligation on the franchisor to provide disclosure as part of the renewal process.

The Court of Appeal did not address what is invariably a developing fundamental difference between failure to provide disclosure in the pre-sale and renewal phases.

This article is provided for information purposes only. Law Works' Franchise Law Blog does not provide legal advice.

For more information about Law Works' expertise and how we may be able to help you, please contact Ben Hanuka at ben@lawworks.ca or by phone at (855) 978-5293.

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Court Of Appeal In Pet Valu: Pre-Sale Disclosure Not Bad Faith Conduct, But Key Issues Remain Unanswered | Law Works

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On January 14, 2016, the Ontario Court of Appeal released its decision in the case of 1250264 Ontario Inc. v. Pet Valu Canada Inc. This was an appeal and cross-appeal by the franchisees and the franchisor from the decision of a motion judge in a class action against Pet Valu relating to volume rebates.

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Corp acquisition of franchised chain - Lowes & RONA

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Corp acquisition of franchised chain - Lowes & RONA

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The vast majority of franchise systems, including hotel systems, depend on operating standards, procedures and policies. These requirements are typically contained in a franchise operating manual that is separate from a franchise agreement.

Particularly in established hotel franchise systems, operating manuals tend to be comprehensive and often complex documents. They may contain extensive requirements with respect to virtually every aspect of the operation of the hotel, from the brand and quality assurance, to the use of technology.

These provisions are typically contained in a manual, rather than in the contract. By their nature, operating standards, procedures and policies are subject to ongoing modification and amendments as the franchise system evolves. In addition, most of these provisions are purely operational, rather than legal, and do not generally relate to the contractual intent of the parties.

Most standard franchise agreements in circulation, including hotel franchise agreements, contain extensive provisions incorporating by reference the requirements of the operating manual, as well as the ongoing revisions in the manual which the franchisor may make from time to time.

The franchise agreement typically incorporates the operating manual by reference through provisions relating to the definition of terms such as the 'system', 'operating standards', 'products' or 'services', and many other related definitions and provisions.
The Conflict
Disputes may arise between franchisors and franchisees about conflicts between operating standards in an operating manual and express or implied provisions in a franchise agreement. This may be particularly so in hotel franchises where operating standards are complex and extensive, and on occasion may result in a significant impact on the operation of the business.

For instance, this conflict may arise when a franchisor seeks to amend a provision in an operating manual which conflicts with an existing provision in a franchise agreement.

Where a conflict arises between a provision in a franchise agreement and an operating manual, which governs over the other?

Is a franchisee deemed to have agreed to the terms of the operating manual - including future new terms that did not exist at the time of entering into the franchise agreement?

Even if the operating manual contained the provision in dispute from the outset, what if the franchisee did not receive and did not review the operating manual at the time of entering into the franchise agreement, as often happens? Is a franchisee deemed to have agreed to all terms and conditions in the operating manual?

Subsidiary questions are whether the terms of an operating manual are legally binding on a franchisee, and whether the operating manual is necessary to give business efficacy to the franchise agreement.
What Constitutes a Material Change
At the heart of the problem is the significance of the proposed operational change - how much it impacts the franchisee's business. In other words, whether the change is expected or has a material or fundamental impact on the franchisee's business.

Ultimately, it is up to the court or arbitration panel in any case to determine whether a particular change in the system, policy or procedure is so material that it can only be implemented through an amendment to the franchise agreement.

Franchise statutes in Canadian provinces contain definitions of 'material fact' and 'material change' in the context of the disclosure obligation. These definitions relate to the disclosure of information in a franchise disclosure document at the time of franchise sale or renewal. While they are not directly relevant to determining whether a change in an operating manual contractually conflicts with a franchise agreement, they may serve as a helpful guideline in the analysis: whether the change is expected to have, or does have, a material impact on the business.

Each of Canada's five provincial franchise statutes defines a 'material change' as "a change in the business, operations, capital or control of the franchisor", or "a change in the franchise system". (Footnote 1) As the definition states, a material change covers any information about any aspect of the franchisor, franchisor's associate, the franchise system or the franchised business.

Recently, a decision on point was addressed by the Yukon Territory Supreme Court, a Canadian trial-level court, on a judicial review from an arbitration.

In the case of Church v. H & R Block Canada Inc., (Footnote 2) the franchisor, H & R Block, amended the operation manual to require all franchisees to use its software program for the preparation of tax returns. However, the use of the software under the franchise agreement was optional.

At the arbitration, one of the main issues was whether the amendment to the operating manual was enforceable.

The franchisee argued that the change in the manual with respect to the required software program was unenforceable for the following reasons: (i) the requirement conflicted with the permissive language in the franchise agreement; (ii) the franchisor's attempt to impose this requirement through the manual was conduct in bad faith, and (iii) the conflict between the amended manual and the franchise agreement resulted in contractual ambiguity, which should be resolved in favour of the franchisee based on the contra proferentem rule.

The majority of the arbitration panel acknowledged that the language in the amended manual and the franchise agreement was contradictory. It also noted that the amended requirement in the manual may have gone beyond a matter of policy and procedure, to a fundamental deviation from the original intention of the parties in the franchise agreement.

However, it ultimately decided that the amendment to the manual overrode the franchise agreement and was legally enforceable.

Underlying the majority's decision was its conclusion that only material changes that were fundamental to the operation of the franchise had to be implemented through a formal amendment to the franchise agreement. It determined that the change to the use of the software did not meet this high threshold.

With respect to evidence, the majority found that the franchisee did not presented evidence about the impact of the software requirement on her business. As a result, there was no evidentiary basis to determine that the change could be considered fundamental.

On a more technical basis of interpreting the terms of the franchise agreement, the majority relied on this established contractual interpretation principle: searching for an interpretation from the whole of the contact that promotes and advances the true intent of the parties at the time they entered into the agreement (see the Supreme Court of Canada decision from 1980 in Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Company). (Footnote 3)

Based on this approach, the majority applied provisions in the franchise agreement - commonly found in most franchise agreements across many industries - requiring the franchisee to operate the franchise in accordance with the "H&R Block system", as well as the rules and regulations specified in the manual.

In addition, the franchise agreement contained provisions permitting the franchisor to amend those rules and regulations from time to time. It also noted the definitions of 'system' and other standard definitions in the franchise agreement, which tied back to operational standards. As well, the franchise agreement was replete with references to the manual and its important applications to the operation of the franchise.

Moreover, the majority of the panel noted that the franchisee initially entered into a separate software licence agreement with the franchisor, which also referred to existing or any future policies that the franchisor established from time to time.

The majority found that, taken together, these requirements created "an overriding obligation" on the franchisee to operate the business in accordance with the system, which includes policy amendments from time to time with respect to the use of the software program.

Based on this approach the majority concluded that the parties could not have intended to require a signed formal amendment to the franchise agreement for each policy change.

The dissenting member of the arbitration panel held that the amendment altered the "fundamental relationship" between the franchisor and franchisee. He concluded that such a requirement could only be enforced through a written amendment to the franchise agreement.

On an application by the franchisee to the Yukon Territory Supreme Court to set aside the arbitration award, the court applied the normal limited grounds of judicial review of commercial arbitral awards, and dismissed the franchisee's application.
Summary
Applying these legal principles to any particular franchise dispute, a conflict between the provisions of an operating manual and a franchise agreement should focus on the following elements: - Whether the change that the franchisor is seeking to implement has or can be expected to have a material impact on the system or the franchisees' business; - Whether a franchisee has evidence of the impact and resulting losses, and - On a more technical level, how well the franchise agreement incorporates by reference the requirements of the operating manual and ongoing amendments to the manual, through express contractual provisions, as well as through key definitions such as the franchise system, the description of services, etc.

Assuming that the franchise agreement contains the necessary contractual provisions incorporating the requirements of the manual by reference, if the franchisee is able to demonstrate that the change is expected to have, or in fact has, a material impact on his or her business, the franchisee has a stronger case to resist the change through an operating manual, on the basis that it can only be agreed through a formal amendment to the franchise agreement.

If there is no credible evidence to demonstrate that the proposed change to the procedure or policy is expected to have a material impact on the business, the franchisee will generally find it more difficult to object to such an amendment through an operating manual.

References

1. See section 1(1) in Ontario's Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3, New Brunswick's Franchises Act, SNB 2014, c 111, Prince Edward Island's Franchises Act, RSPEI 1988, c F-14.1, Manitoba's The Franchises Act, CCSM c F156, and Alberta's Franchises Act, RSA 2000, c F-23. Other components of the statutory definition relate to the reasonable, objective standard on which to evaluate the material change, which is more relevant to the disclosure test, rather than a contractual assessment.

2. 2013 YKSC 76, 233 A.C.W.S. (3d) 284, 2013 CarswellYukon 74

3. [1980] 1 S.C.R. 888.

Conflicts Between Franchise Agreements and Operating Manuals: A Canadian Perspective, by Ben Hanuka

Ben Hanuka, J.D., LL.M., C.S. Ben practices in the areas of franchise law and business disputes. Mr. Hanuka is Board Certified in Ontario as a Specialist in Civil Litigation and is ranked in the Canadian Lexpert Directory as a leading practitioner in franchise law. Mr. Hanuka has acted as counsel in novel and leading Ontario decisions relating to franchise disputes. Mr. Hanuka can be contacted at 866-716-6497 or ben@lawworks,ca.

This article is provided for information purposes only. Law Works' Franchise Law Blog does not provide legal advice.

For more information about Law Works' expertise and how we may be able to help you, please contact Ben Hanuka at ben@lawworks.ca or by phone at (855) 978-5293.

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Conflicts Between Franchise Agreements And Operating Manuals: A Canadian Perspective | Law Works

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The vast majority of franchise systems, including hotel systems, depend on operating standards, procedures and policies. These requirements are typically contained in a franchise operating manual that is separate from a franchise agreement. Particularly in established hotel franchise systems, operating manuals tend to be comprehensive and often complex documents.

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Greg's 2-Minute Tips

Franchise Relationships Founder
Greg Nathan, shares his insights
on franchising and life.

Subscribe to Greg's Tips via Email

These blog postings are based on the email series "Greg's Healthy Franchise Relationships 2-Minute Tips". If you would like to receive these tips by email, please provide your details below:

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Why 28% of Franchisees Get the Thumbs Down

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Greg's 2-Minute Tips Franchise Relationships FounderGreg Nathan, shares his insightson franchising and life. These blog postings are based on the email series "Greg's Healthy Franchise Relationships 2-Minute Tips". If you would like to receive these tips by email, please provide your details below:

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Difference  between Franchising and Licensing

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Difference  between Franchising and Licensing

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A franchise is a license, though you usually don't find someone so focused on language minutia that they make a big deal out of the distinction in the sense of business opportunities. The term "get a life" springs to mind as I read your account of them correcting you on this small matter.

A franchise is a license issued to someone to operate a business using a common brand name, a common operating support system and involving the payment of initial and/or ongoing fees.

If the company you were talking to has those three components as part of their offering, then they are in fact offering a franchise, whether or not they choose to call it a license.

There are also many types of licenses that are not franchises. For example, when you buy a copy of Microsoft Office you are not actually purchasing Office--you are entering into a license agreement that allows you to use the product under the specified terms and conditions they have outlined in the license agreement (all that fine print that no one reads).

There are business opportunities that are not franchises, though I don't know of any bizopps that label their opportunity as a license. Business opportunities are like franchises except that they are missing one of the three necessary ingredients mentioned above--typically a common brand.

If the person you were dealing with meant to say that they were a business opportunity rather than a franchise, they need to go back to hair splitting school to learn some new terminology.

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What is the difference between licensing and franchising?

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A franchise is a license, though you usually don't find someone so focused on language minutia that they make a big deal out of the distinction in the sense of business opportunities. The term "get a life" springs to mind as I read your account of them correcting you on this small matter.

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Greens MP Adam Bandt's bill to make franchisors responsible for underpayments of employees by franchisees would be the "kiss of death" for small franchises if it were to become law, according to one expert.

Bandt introduced the bill into federal parliament yesterday, saying the government needed to take urgent action in the wake of the 7-Eleven scandal.

However Jason Gehrke, director of the Franchise Advisory Centre, told SmartCompany the proposed legislation represents a "breathtaking lack of understanding".

"However well-intentioned Bandt's proposal may be, it is misguided and does not address the problem of any small business owner underpaying staff - be it franchises or otherwise," Gehrke says.

"The effective solution would be greater resourcing of the Fair Work Ombudsman."

Gehrke says if a franchisor is held liable for the employment misdeeds of a franchisee, those misdeeds could cause significant damage to a small franchise operation and make it no longer viable.

"There's a moral hazard here too," Gehrke says.

"If franchisees, for whatever reason decide not to pay their staff and then the buck gets passed to the franchisor, they [franchisees] will get away with it.

"People have to be responsible for their own actions and decisions. Employment responsibility must always act with the employer."

Introducing the bill into Parliament yesterday, Bandt said Australians have been shocked by reports of "rampant exploitation" of 7-Eleven workers and expect the government to do something about it.

"Journalists and whistle-blowers exposed the 7-Eleven scam and are now exposing many more," Bandt said.

"But the reality is that government should have picked it up earlier. As politicians, we must now ask how this kind of widespread flouting of labour laws could happen."

Bandt says the proposed legislation would help employees recover wages from a franchise's head office if they are unable to retrieve them from the franchisee.

"The bill will help avoid widespread worker exploitation in franchises like that of 7-Eleven across the country," he said.

"It will do this by making head office franchisors responsible for their franchisees' underpayments. If franchisors can enter into franchisee contracts and then turn a blind eye to what happens in their stores under their brand name, workers can get exploited."

A spokesperson for Bandt told SmartCompany the member for Melbourne is not aware of the government's position on the bill so far but is looking to enter into discussions with the Coalition, Labor and crossbench MPs in order to seek their support.

The bill was supported by independent Tasmanian MP Andrew Wilkie.

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Adam Bandt's 7-Eleven bill labelled a "kiss of death" for small franchises - SmartCompany

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Greens MP Adam Bandt's bill to make franchisors responsible for underpayments of employees by franchisees would be the "kiss of death" for small franchises if it were to become law, according to one expert. Bandt introduced the bill into federal parliament yesterday, saying the government needed to take urgent action in the wake of the 7-Eleven scandal.

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So you've decided that you want to buy a franchise. You've done a few Google searches, read a few magazines or blog posts and now you want in.

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Hanuka article talks franchising at mid point

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Hanuka article talks franchising at mid point

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The rate of US retailers setting up shop in Canada has been intensifying as of late. Canadian consumers generally embrace American brands. Yet the road for U.S. retail chains expanding north of the border is not always rosy. If pursued too aggressively, it often turns rough, sometimes disastrous.

While Canada and the US share an intertwined economy, to successfully expand into the Canadian market, US retailers need to understand Canadian consumers and key business factors affecting retailing: because when in Rome, do as the Romans do.

The know-how of US businesses in what it takes to successfully expand into Canada is far from uniform. Many US retailers quickly get tangled in the strong consumer currents that lurks underneath the seemingly calm waters. They soon discover that expanding into Canada is no walk in the park. Large and sophisticated US retailers fail in fundamental aspects of their expansion strategies. Among the most recent large scale forays north of the border, Target Corp. hit a wall with higher than expected expansion costs and significantly lower than expected sales, having set up operations in well over 100 former Zellers stores in just under one year.

Companies opting for a slower, more methodical, strategy, first testing the waters and gradually adapting to the business and consumer environments, stand a far better chance. The recent expansions of Crate and Barrel and Lowe's, with a slow but solid year-over-year store growth in the initial phase, are examples.

Doing business in Canada can be very profitable. BMO Capital Markets reports that Canadian retail sales are equivalent to US sales on a per capita basis. Canada has higher sales per square foot than in the US. And Canada only has 14 square feet of shopping-floor area per capita, compared with 23 square feet in the US.

More than a mere few US retailers assume that expanding into Canada, because of its relatively small population (the population of California alone, at about 38 million, is larger than Canada's roughly 35 million), is akin to expanding into just another state. Making this assumption - blindsided by the admittedly vast similarities across all walks of life -- is downright dangerous. Such companies cross the border at their own peril.

A smart entry strategy was deployed several weeks ago by Signet Jewelers Ltd.'s acquisition of Zale Corporation, which owns among others, the Peoples Jewellers and Mappins brands in Canada: expansion through merger or by taking over an existing successful Canadian chain.

Similarly, Limited Brands Inc., the owner of the Victoria's Secret lingerie brand, paved the way for a successful expansion in recent years by taking over the Canadian La Senza chain, which was not in competition with its higher-end boutiques and provided it with a significant access to real estate in shopping centres.

Being taken over by a Canadian company, akin to a reverse takeover of sorts, is another promising strategy. Last fall, Canadian department store Hudson's Bay Co. announced its buyout of US's Saks Fifth Avenue.

Over the past several decades, some US retailers have gone on to thrive in Canada's retail landscape, such as retail giants Home Depot Inc., Staples, Costco, Wal-Mart and Starbucks. But it was not all smooth riding. Not all brands or business models will make it in Canada, even if owned by the same retail chain, no matter how sophisticated. Wal-Mart, which first arrived on the Canadian scene by taking over Woolco in 1994, continues expanding its general and supercentre stores, but closed down its Sam's Club stores a few years ago, unable to compete with Costco, which had set up shop in Canada earlier.

Two key obstacles are at the heart of the problem: the cost of doing business in Canada, which is significantly higher than in the US, and consumer preferences, which have their differences and nuances.

First, the cost of labour is generally higher. Minimum wages are higher in Canadian provinces, coupled with a higher taxation burden.

Second, supply of retail real estate is far more limited than in the US and its cost is higher. Real estate commercial vacancy rates in Canada are at historic lows. Increase in the real estate supply is limited, particularly in the core centres.

Third, moving goods across the border further increases costs. Ours is a vast country spread over enormous territory. Bringing inventory into Canada, dealing with customs and managing the inventory across the land requires significant resources, and reconfigured logistical channels. It may be no wonder that Zappos closed down its Canadian e-commerce operations as a result of customs and other cross-border logistical constraints.

Fourth, the legal regulatory framework is different. Canada is a foreign country. Among the many legal differences, for example, are language, labeling and many other regulatory requirements, all of which add to costs.

In the franchise context, which more than a few retailers use for all or portions of their business models, legal requirements and implications are significant. Provincial franchise disclosure laws, currently in Ontario, Alberta, Manitoba, New Brunswick, and Prince Edward Island (with British Columbia on the way), require that all 'material facts' relating to the franchise company or the proposed franchise purchase be disclosed. A material fact is defined broadly as any information about the franchise company or the proposed investment that would be expected to affect a reasonable franchisee operator's decision to make the purchase, or the price that he or she is willing to invest in the proposed franchise.

Material facts include all of the factors outlined earlier in this article -- all these have to be legally disclosed to potential franchisee operators. Often, they are not adequately disclosed, creating legal disputes of significant proportions and financial consequences for the franchise company expanding into Canada and its franchisee-operators.

Sixth, consumer tastes and trends are different. While major Canadian shopping centres may seem to the untrained eye not much different from their US counterparts, significant differences in consumer patterns and preferences are alive and well.

Knowing the right product mix and maintaining adequate supplies of it has proven to be a challenge for US retailers.

Canada's economy is comprised of regional commercial centres that are far apart, and to some extent, independent of one another. Some of Canada's population hubs are immensely multi-cultural; others are less so. Consumer differences are sometimes driven by the four seasons experienced in most Canadian cities, and the generally colder weather.

Heritage plays a role here. Queen Elizabeth's Canadian representative is charged with, among other functions, promoting Canadian national identity. Lawyers robe in court (but, thank goodness, do not wear wigs). And Canada's Harry Rosen Inc. is recognized as a leader in men's retail fashion worldwide.

In sum, Canadians are different from our US cousins. But more so, like our US cousins, we are an immensely proud nation.

US Retailers must appreciate this complex dynamic and the nuances in Canadian society and the business landscape. They need to adapt their brands and product offerings accordingly.

One would think that with the gigantic ongoing advances in "big data" business analytics, retailers have the means to develop a sense of Canadian consumers' shopping patterns and preference for their product categories, before actually planting foot here. US retailers need to accept the need to make significant changes to their operations. Their expansion strategies should be marked by a contemplative strategy of crawling before walking; certainly not hitting the ground running.

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The Dangerous Mistake U.S. Retailers Make in Canada

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The rate of US retailers setting up shop in Canada has been intensifying as of late. Canadian consumers generally embrace American brands. Yet the road for U.S. retail chains expanding north of the border is not always rosy. If pursued too aggressively, it often turns rough, sometimes disastrous.

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El Pollo Locco

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5 min read
Franchise Players is Entrepreneur's Q&A interview column that puts the spotlight on franchisees. If you're a franchisee with advice and tips to share, email ktaylor@entrepreneur.com.
Born in in Vietnam 1970, Phong Huynh was an orphan adopted by a church in Minnesota, where he lived until age 13. That year, he took a Greyhound bus to California and lived on the streets in San Gabriel Valley for two years. He began working nights unofficially in an El Pollo Loco restaurant at 15, and at 16 became a cook, prep employee and cashier. Once his employers recognized his drive, however, his career took off: He was a crew leader at 17, assistant manager at 18 and a general manager at 19. He went on to top-level corporate jobs in the company, becoming its franchise training manager at 29 and director of franchise operations, outer markets, at 37. In 2009, Phong became a franchisee operating partner of an El Pollo Loco restaurant. Then, in 2012, he became a franchisee owner; today, he owns 13 El Pollo Loco restaurant and commercial properties.

Image credit: Phong Huynh, Pack-Huynh, LLC
Name: Phong Huynh, Pack-Huynh, LLC
Franchise owned: 13 El Pollo Loco restaurants, four in California (Vista, San Marcos, Hemet and Thousand Oaks) and nine in Arizona (Phoenix, Mesa, Glendale and Gilbert).
How long have you owned a franchise?
I have been an El Pollo Loco franchise owner since 2009.
Related: Long Seen as Boring, Chicken Is Becoming a Buzz Item for Restaurants Why franchising?
Growth, first of all: I guess you can say I practically grew up with El Pollo Loco, since I started in 1986 as a night porter, sleeping inside the restaurant. At that time, the total restaurant count was fewer than 100 units, and now it's over 400 restaurants, which was my dream from day one! The second reason was that I witnessed an experienced franchisor with an established system who provided tremendous operational support and helped me achieve success as a rookie franchisee.

Third, the El Pollo Loco leadership team is highly motivated and has a track record of success in the restaurant industry. The team provides support and encouragement to the franchise system and works hard to help us run successful franchises.

The fourth reason why I became a franchisee of El Pollo Loco is that I truly believe in the quality of our freshly prepared entrées that could only be duplicated in a home setting. My wife and I, as well as our kids, grew up eating these guilt-free meals at least five days a week for the past 25 years. It is definitely a home meal replacement for us, and I deeply believe that El Pollo Loco is uniquely positioned to serve many more guests nationwide.
What were you doing before you became a franchise owner?
I was a determined hourly employee doing my best every day to make a life for myself and seize the opportunity that El Pollo Loco offers. I worked really hard to be the best at what I did while also attending school to further my education. The dedicated El Pollo Loco executives supported me throughout the process by providing a flexible work schedule so I could succeed. I then rose through the ranks, from assistant manager and general manager to district manager and director of franchise operations.
Why did you choose this particular franchise?
El Pollo Loco is a great company with a successful track record that offers quality meals that I'm proud to serve every day to my guests. I wholeheartedly believe in the food and the company as a whole.
How much would you estimate you spent before you were officially open for business?
My transition from an operating partner to a franchisee required me to use up my savings of $750,000 to purchase my first turn-key franchised El Pollo Loco restaurant in Hemet, California, for $600,000 cash. The balance of $150,000 was put into a special business operating account to pay for initial operating costs, franchise fees, payroll expenses, etc.
Where did you get most of your advice/do most of your research?
The best research I did was learning about the company from the ground up, as I worked at every possible position within the four walls. My 28 years of experience with the company helped me grow as an operator and a leader. I also held corporate positions, in areas including marketing, training, research and development and, most important, field operations.
Related: Goodbye, Burgers. Hello, Wings: This Franchisee Had Good Reason to Quit McDonald's What were the most unexpected challenges of opening your franchise?
Attracting great employees and great managers. Talent is the number one priority for me and I'm continuing my effort every day in this business to build a great team. At first, I thought that by paying more, I would get great managers, but in reality that does not always equate in a franchise environment. I found out that talented employees and managers seek certainty in their everyday role and want to contribute to the company's success.
What advice do you have for individuals who want to own their own franchise?
As a franchisee, it is important to be self-motivated and passionate about the business and to have the ability to attract highly talented people at all levels.
What's next for you and your business?
My personal ongoing goal is to see my three kids graduate from college and continue to grow as a franchisee of El Pollo Loco, a brand that I truly believe is uniquely positioned to spread like wildfire throughout the country.
Related: How Wingstop Aims to Fly Above the Fast-Casual Competition After Its Surging IPO

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This Franchisee's Story Gives True Meaning to Today's Celebration of the American Worker

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5 min read Franchise Players is Entrepreneur's Q&A interview column that puts the spotlight on franchisees. If you're a franchisee with advice and tips to share, email ktaylor@entrepreneur.com. Born in in Vietnam 1970, Phong Huynh was an orphan adopted by a church in Minnesota, where he lived until age 13.

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Greg's 2-Minute Tips

Franchise Relationships Founder
Greg Nathan, shares his insights
on franchising and life.

Subscribe to Greg's Tips via Email

These blog postings are based on the email series "Greg's Healthy Franchise Relationships 2-Minute Tips". If you would like to receive these tips by email, please provide your details below:

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The Science of Being Happy and Successful

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Greg's 2-Minute Tips Franchise Relationships FounderGreg Nathan, shares his insightson franchising and life. These blog postings are based on the email series "Greg's Healthy Franchise Relationships 2-Minute Tips". If you would like to receive these tips by email, please provide your details below:

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Mixing art and wine has turned out to be a fine business model for Pinot's Palette. This franchise teaches people how to paint while enjoying a glass of wine with friends. CEO Craig Ceccanti explains how his "paint and sip" concept became such a phenomenon.

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What Franchisees look for

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Greg's 2-Minute Tips

Franchise Relationships Founder
Greg Nathan, shares his insights
on franchising and life.

Subscribe to Greg's Tips via Email

These blog postings are based on the email series "Greg's Healthy Franchise Relationships 2-Minute Tips". If you would like to receive these tips by email, please provide your details below:

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Greg's 2-Minute Tips Franchise Relationships FounderGreg Nathan, shares his insightson franchising and life. These blog postings are based on the email series "Greg's Healthy Franchise Relationships 2-Minute Tips". If you would like to receive these tips by email, please provide your details below:

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The Breakout Brands of 2015 | Nation's Restaurant News

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This year, NRN names 10 brands with concepts that stand out and show potential for growth.

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Colonel Sanders is back on television in the US promoting KFC.

The fried-chicken chain will have comedian Darrell Hammond portray the company's bearded founder in a new set of ads running on TV and social media. The move is part of an effort to update the chain's restaurants and packaging, with newly designed chicken buckets, bags and boxes.

KFC, which is celebrating the 75th anniversary of its original chicken recipe this year, follows McDonald's in trying to attract new customers with personalities from fast food's past. A reimagined version of McDonald's Hamburglar began appearing on social media this month to promote the chain's third-pound burgers. Wendy's also introduced a real-life version of its namesake character in recent years.

Read also:
* Hot new Hamburglar - sexy or creepy?
* The latest fast food nightmare

Burger King, meanwhile, has embraced the strange side of its mascot lately. The silent, grinning King entered Las Vegas's MGM Grand Garden Arena alongside Floyd Mayweather during the fighter's highly publicised title bout against Manny Pacquiao earlier this month.

Yum Brands, which owns KFC, is putting its marketing muscle behind the chain after an earlier effort to revamp Taco Bell. The company agreed to invest $185 million in domestic franchised KFC stores earlier this year. Unlike McDonald's, which is still struggling, the chain has seen an uptick in revenue. Same-store sales for KFC, outside of China, rose 5 per cent in the company's latest quarter.

The real Colonel Harland Sanders hasn't featured in TV ads for KFC in about 20 years.

KFC, which has about 4,300 US restaurants, is making the changes after falling behind other chicken chains in customers' esteem. It ranked last, below Chick-fil-A, Bojangles', Boston Market, Popeyes Louisiana Kitchen and El Pollo Loco, for food quality, value and atmosphere, according to a survey last year by Nation's Restaurant News and WD Partners.

In connection with the new Colonel marketing campaign, KFC also is introducing menu items, such as a new dipping sauce and Kentucky baked beans with pulled chicken. It's also planning to remodel stores across the country during the next few years.

"The Colonel has always been at the core of everything we do here at Kentucky Fried Chicken," Kevin Hochman, chief marketing officer for KFC's US operations, said in a statement. "The 75th anniversary is the perfect time to give him back to the people and remind everyone of what we're all about."

- Bloomberg

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Colonel Sanders resurrected as KFC tries to revamp image

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Colonel Sanders is back on television in the US promoting KFC. The fried-chicken chain will have comedian Darrell Hammond portray the company's bearded founder in a new set of ads running on TV and social media. The move is part of an effort to update the chain's restaurants and packaging, with newly designed chicken buckets, bags and boxes.

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Franchise Disclosure Law: Arthur Wishart Act (2000)

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Franchise Disclosure Law: Arthur Wishart Act (2000)

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You're using an outdated browser. This website will not display correctly and some features will not work.Learn more about the browsers we support for a faster and safer online experience. Our staff can't provide legal advice, interpret the law or conduct research. You may be able to obtain assistance from a lawyer or paralegal.

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Reference List of Selected Literature on Franchising

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Reference List of Selected Literature on Franchising

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Online Course: Franchise Business Management Essentials

The landmark project seeks to create a pathway for suitably qualified Indigenous persons to transition to small business ownership via the franchise sector. The 'Franchise Model Evaluation and Pilot Program for Advancing Indigenous Business Initiative' project is being undertaken by The University of the Sunshine Coast (USC) Business School in conjunction with FranchiseED with support from the Queensland Government. Learn more

FranchiseED (previously 'Asia-Pacific Centre for Franchising Excellence') was created to help people like you find independent information and research on franchising.

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FranchiseED - Contributing to the building of a sustainable franchise sector

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FranchiseED (previously 'Asia-Pacific Centre for Franchising Excellence') was created to help people like you find independent information and research on franchising. FranchiseED is a Not for Profit which provides services to the franchise sector to provide education to encourage best practice.

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Pretzels Mini Pepperoni Cheese Pretzels Video

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Wetzel's Pretzels: The Business Behind Franchising

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April 24 (Bloomberg) -- Wetzel's Pretzels CEO and Co-Founder Bill Phelps and Co-Founder Rick Wetzel discuss the business behind franchising with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg) -- For more "Taking Stock" videos: http://bloom.bg/ODNNhJ -- Subscribe to Bloomberg on YouTube: http://www.youtube.com/Bloomberg

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AAHOA Ed. Experience, Fair Franchising Episode 48

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Fair Franchising, relationships between franchise owners and franchise operators.

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ADP National Franchise Report | February 2015

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U.S. Added 29,000 Franchise Jobs in February, According to ADP National Franchise Report

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Image credit: Shutterstock

8 min read

This story appears in the August 2013 issue of Entrepreneur. Subscribe "

Imagine you're thinking of leaving your job to open a business and decide to do a little research into franchising. A Google search may lead to an evenly balanced sermon on the pros and cons of franchise ownership. Or you may land on this gem from About.com: "Some studies show that franchises have a success rate of approximately 90 percent as compared to only about 15 percent for businesses that are started from the ground up. The increased probability of success usually far outweighs any initial franchise fee and nominal royalties that are paid monthly."

Most experienced franchisees would laugh themselves hoarse after reading that statement. But what about a novice entrepreneur who is considering going it alone? That's the type of thing that might get their heart set on franchising.

Dig a little deeper and you'll find that About.com is not alone in espousing such numbers. That claim and myriad variations are all over the internet, from business articles written by people who should know better to puffery put out by franchise brokers and consultants. It's known as "The Stat"--the notion that franchises have a success rate of 90 to 95 percent--and it has helped fuel franchise fever for decades. It's also completely unproven.

As an industry model, franchising has been poked and prodded and analyzed by economists since its inception. There are figures on how much franchising contributes to the economy, ownership rates among various demographics, loan performance and a monthly index that shows the strength of the sector as a whole. But that one stat, the success rate of franchised businesses vs. independent shops, has had the biggest impact, even though its origins are dubious. In the absence of solid data, The Stat, which is based on a discredited study, has stepped in to fill the void.

Bad information is the bread and butter of the internet, but this particular nugget is especially troubling. Franchising is one of the most heavily regulated industries in the U.S. for a reason--it has suffered from high-profile cases of misrepresentation and fraud. Critics point to The Stat as a willful misrepresentation and an attempt to sucker people into buying franchises. In many ways it really does lure people into franchising, even if a franchisor has never made the claim. The ubiquity of The Stat means that many candidates come into their businesses thinking franchise ownership is practically guaranteed success.

Robert Purvin, who believes his 1994 book The Franchise Fraud was the first to cast doubt on The Stat, contends it has had an even bigger impact. "Even if the success rates were true, focusing on franchising as a path to riches instead of small-business ownership has caused the industry to evolve in ways detrimental to franchisees," he says. "They've become less and less protective of franchisees over the years."

The Stat was not just created from whole cloth. In the 1980s, the U.S Department of Commerce published the results of a voluntary survey of nearly 2,000 franchisors who submitted data disclosures. Some analysts interpreted the data to say that over a five-year stretch, 5 percent of units closed. Flip that around, and you have the stat that franchises have a 95 percent success rate over a given five years. Here's the catch: The data was not audited, and since franchisors chose whether or not to answer the questions, it is likely that the pool of respondents included more successful franchises than unsuccessful ones.

The Stat, with the imprimatur of the Commerce Department, took on a life of its own. Even after the survey was discontinued and the International Franchise Association sent out a letter asking franchisors and brokers to scrub the stat from the web--a request it has repeated several times since--it has been difficult to close Pandora's box. The SBA has also put out numerous calls over the years to disregard the data, making its latest plea last fall.

But many in the industry haven't gotten the message. "It's amazing the number of franchise brokerages still putting it on their website," says franchise consultant Joel Libava, who has written several articles critical of The Stat. "It gives prospective buyers a false impression. There's enough spin out there telling people to buy a business in a box or turnkey business. The Stat welcomes them to take a risk and make bad assumptions about their chance for success."

The main reason The Stat has survived a quarter century of rebuttal and criticism is that no credible number has emerged to replace it. The SBA has released papers showing that in the early 2000s, defaults on its loans were higher for franchised vs. independent businesses. But the most comprehensive study was conducted in 1994 by Timothy Bates, professor emeritus at Wayne State University. His analysis of more than 20,500 small businesses found that 65.3 percent of franchises survived after four years, compared to 72 percent of independent businesses. Retail franchises fared worse, with a 61.3 percent survival rate, vs. 73.1 percent of independent retail businesses.

Brian Headd at the SBA's Office of Advocacy points out that all these studies are long in the tooth and don't represent the current economy. More broadly, he questions the overall usefulness of calculating franchise success rates at all. "Survival isn't everything," he says. "Business owners have to make up startup costs and try to break even. Just existing for five or six or seven years doesn't necessarily mean success."

So why has no ambitious economist or franchise maven taken on the research? Jania Bailey, president of franchise brokerage FranNet, says looking at franchising as a whole would be extremely difficult, and the results would likely not be useful. "You'd have to look at the FDDs [ Franchise Disclosure Documents] of 3,100 companies in 80 industries," she says. "There are new franchises and mature franchises. The success rates between the two are going to be night and day."

However, her company did want to investigate the success rate of its own clients, so last fall FranNet looked at 1,500 individuals it had helped get into franchised businesses between 2006 and 2010. According to the internal research, 91.2 percent of the businesses were still open after two years, and 85 percent were operating after five years. But Bailey is quick to point out that those stats don't extend to franchising in general--she attributes the high success rate to the FranNet system. "Arguably, the time period we studied had the worst economic conditions since the Great Depression," she says. "That success rate speaks volumes about our ability to match a person and their skill set to the right franchise concept."

Libava, a former FranNet franchise broker, is skeptical of any studies that attempt to quantify franchising as a whole. Each case is unique, he argues, and success is mediated by the performance of individual franchisees, not by the strength of the franchising model. "Here's how I look at it: The perfect franchise candidate is in the perfect time of their life, has funds and chooses the right franchise for his geographic area," he says. "A lot of things have to line up, and if they do, I feel in my heart a franchisee has a better chance of success than an independent startup. But there's no guarantee of that."

Headd at the SBA takes a more practical view of success. His research has shown that bigger fish tend to survive longer, whether they are independent or part of a chain. "The bottom line is, the larger you are at startup, the more likely you are to stay open," he says. "It helps to start larger and faster, but it has a cost. And it's up to the individual to decide if franchising is the right formula for them, or being independent."

Purvin agrees that research that lumps together thousands of unrelated business concepts, from gyros to muffler repair, into one statistic is ultimately meaningless. "Franchising is just a way of doing business; it's not a script for success," he says. "The world is constantly evolving, and all of those 'proven' systems have to evolve, too. Proven success does not guarantee success tomorrow. Look at McDonald's: Thirty years ago it was focused on burgers and shakes; now it's a coffee shop. It has constantly innovated. Any company standing still and focused on its 'proven method' is a company that will be a dinosaur. Buying a company that holds back from change is not a path to success."

So are franchises more successful than independent businesses? Bailey at FranNet believes franchising can have benefits over going it alone, but she's not willing to put a number on it. "I think the crux of what we do and the reason we're so committed is that franchising works," she says. "You have the support of the franchisor and the experience of other franchisees. You have a back room you don't have when you go out on your own."

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What Is the Real Survival Rate of Franchised Businesses?

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8 min read This story appears in the August 2013 issue of Entrepreneur . Subscribe " Imagine you're thinking of leaving your job to open a business and decide to do a little research into franchising. A Google search may lead to an evenly balanced sermon on the pros and cons of franchise ownership.

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Flexibility and control have long been touted as the perks of being your own boss and now self-employed Australians can add financial comfort to the list of advantages.

A new study has found self-employed Australians feel more financially secure than wage and salary earners, even if they aren't paid as much.

For Supercheap Storage founder Edward Thirlwall, choosing your own working hours is a standout feature of being self-employed.
Photo: STUDIO COMMERCIAL

ME Bank's latest Household Financial Comfort Report found full-time self-employed people rated their financial comfort at 6.9 out of 10, up 24 per cent in the six months to December 2014.

Full-time self-employed workers reported the highest financial security in Australia's labour force and the highest since the report began three years ago.

Financial comfort rose across all segments of the labour force, including the unemployed.

"The fear of the unknown can, at times, be daunting when you have moved from a stable income with fixed annual increase and benefits of superannuation, sick leave, maternity leave to running a small business with a negative cash position, instant overheads [and] no guarantee of success," Kent says.

"Whilst the business established itself in the first two years of operation, there was definitely a period of financial instability, which was uncomfortable."

The failure rate of start-ups is both inspirational and unnerving, she says.

"That statistic of 60 per cent of new businesses fail is always in the back of your mind, but it is also a great motivator to get out of bed in the morning and work harder to achieve your goals," Kent says.

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Flexibility and control have long been touted as the perks of being your own boss and now self-employed Australians can add financial comfort to the list of advantages. A new study has found self-employed Australians feel more financially secure than wage and salary earners, even if they aren't paid as much.

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Franchising is simply a way of doing business –
it is not formula for guaranteed success

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Franchising is simply a way of doing business –
it is not formula for guaranteed success

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Franchising as a path to small business ownership
and not as a get rich quick scheme

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1.      
Franchising as a path to small business ownership
and not as a get rich quick scheme

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Fall seems to be the season where I'm the busiest, either drafting franchise agreements and franchise disclosure documents (FDDs) for franchisor clients or reviewing these documents on behalf of prospective franchisees. Indeed, many franchisors go into full swing in the autumn, marketing their concepts across Canada, so now's a good time to review some of the major points to consider when considering buying a franchise.

1. What's a franchise? A franchise is essentially a licence to operate the franchisor's business system and use its trademark according to the franchisor's standards. The term is normally for between 5 and ten years, depending on the agreement and the lease. In exchange for the right to carry on business under the franchisor's trademark and system, the franchisee usually pays the franchisor an initial fee for these rights (somewhere between $15,000 and $100,000), and an ongoing royalty linked to the gross sales of the franchised outlet (between 5 per cent and 8 per cent of gross sales). There's usually a requirement for the franchisee to make regular contributions to a regional or national advertising fund as well (between 1 per cent and 4 per cent of gross sales), so that the franchisor can advertise the brand in high-cost media using the contributions of all franchisees. If it's a bricks and mortar business, the franchisee either constructs and develops the premises itself (at its cost) or can buy the constructed premises on a 'turnkey' basis from the franchisor.

Franchisors are essentially selling three things: the value of a (hopefully) recognizable trademark and brand; the know-how associated with the franchisor's business system (and the franchisor being able to teach that know-how to the franchisee); and the lower unit costs that come from the purchasing power of a large buying group

2. You're not buying the business system, you're renting it. You're simply acquiring the rights to use a franchisor's business system, trademark and 'know-how' for 5 or ten years, depending on the term of the franchise and any renewal rights contained in the franchise agreement. Think of it like a lease. You're 'renting' the franchisor's business system and brand for a time, and when that time is up, it's over. Those rights revert back to the franchisor, who can sell those rights to someone else

3. Renewal and assignment rights are not automatic. Virtually all franchise agreements allow for the right to renew for at least one term, and permit the franchisee to assign the contract. But there are always conditions (and fees) that go along with the exercise of renewal and assignment rights. If you don't meet those conditions, you wont be able to renew or assign.

4. Critically assess the FDD and all financial and other information given to you. Franchisors awarding franchises in Alberta, Ontario, Manitoba, New Brunswick and PEI are required by law to provide a FDD to prospective franchisees at least 14 days before the franchisee signs any agreement relating to the franchise or pays any money (this differs slightly depending on the province).

The FDD is required to contain all material facts relating to the franchise investment, and there are very serious legal remedies available to franchisees if the franchisor fails to comply with its disclosure obligations. Read the FDD and the documents attached to it carefully with your lawyer and financial advisor. Remember that although these documents will assist you in assessing the nature of the investment, they're always written for the franchisor's benefit, and will be crafted to put the franchisor and the franchise system in the best light possible, even when there are lawsuits and other problems facing the franchisor. Also appreciate that if you are in B.C., Saskatchewan, Nova Scotia, Newfoundland and Quebec, there is no legal obligation for a franchisor to provide you with its FDD, and no statutory remedies available to you in the event the franchisor fails to disclose a material fact relating to the franchise as in Ontario, Alberta and the other 'disclosure provinces.'

5. Be careful of U.S. franchise agreements that have not been adapted to Canadian laws. Sometimes U.S.-based franchisors forget that Canada is a separate country. They don't modify their agreements to suit Canadian laws. In particular, a U.S. franchisor may not have contemplated the effect of Canadian withholdings tax, something I've written about before and which could cost you additional money if not dealt with at the outset of the arrangement.

6. Don't get sidetracked negotiating the boilerplate. Franchisors pay their lawyers lots of money to draft standard, solid and enforceable franchise agreements that they can use with all their franchisees with little or no amendments. The franchisee lawyer that sends the franchisor a 25-page list of changes to the franchisor's agreement is arguably unfamiliar with the norms of the franchising relationship. Part of the lawyer's job is to know what's 'normal' and what's not; what's negotiable and what's not.

7. If you can, avoid entering a franchise agreement where both you and your spouse have to guarantee the contract. It only means the franchisor has two of you to sue if the business fails. If at all possible, limit your exposure so that only one of you assumes all the risk. You might also consider capping any personal guarantee to a maximum amount.

8. Trademarks. Does the franchisor own or control the trademark? (The Canadian Intellectual Property Office has a search engine that allows you to check trademark applications and registrations here)

9. Pricing for products. What assurances are there that the products for sale by the franchisor can be bought by the franchisee at competitive prices? What if the products for sale have to be shipped from another part of the country, or another country? Have you factored in freight costs and duty? A 91-cent dollar can create problems for Canadian franchisees who may be required to buy products from the U.S. in U.S. dollars and pay royalties and other fees in U.S. dollars.

10. Exclusive territory. Are you getting an exclusive territory as part of the deal? Can it be lost or reduced?

11. Don't forget to talk to other franchisees in the system. Even if they're in other parts of the country thousands of miles away, their input is invaluable. And if they are reluctant to speak with a stranger out of the blue, ask these three questions: Are you happy? Are you making any money? Would you do it again?

12. If the franchisor is not a member of the Canadian Franchise Association (CFA), ask 'why not?' The CFA is the only association of franchisors and service providers in the franchise industry in Canada. It has extensive rules on ethical franchising and advises prospective franchisees to investigate before investing. If the franchisor isn't a member, why not?

13. Don't let your expectations get away from you. Finally, like any other investment, acquiring a franchise involves a high degree of risk. Some franchises work out very well for the franchisees. And some do not. Do not sell the concept to yourself. Be prepared to walk away.

Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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Thirteen things to consider before buying a franchise in Canada

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Fall seems to be the season where I'm the busiest, either drafting franchise agreements and franchise disclosure documents (FDDs) for franchisor clients or reviewing these documents on behalf of prospective franchisees. Indeed, many franchisors go into full swing in the autumn, marketing their concepts across Canada, so now's a good time to review some of the major points to consider when considering buying a franchise.

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Image credit: Julia Vandenoever

10 min read

This story appears in the March 2015 . Subscribe "

Around the office, Hao Lam is known as "the old man." By franchise-industry standards, the 47-year-old owner of Best in Class Education Center represents a fairly average age. But Lam's COO is only 27. Everyone else on the corporate staff is in their late 20s or early 30s. And about one-third of Lam's franchisees are Millennials, the generation born between the early 1980s and the early 2000s.

Lam is the only non-Millennial at Best in Class, and he likes it that way. "Millennials are willing to listen and willing to take the help you provide. It's really good," he says. "They may not have the experience of Gen Xers or Baby Boomers, but nowadays the younger generation is so well-rounded."

Ten years ago you would be hard-pressed to find anyone in the franchising industry who thought people in their 20s or early 30s were prime franchisee candidates. For the most part, franchise ownership has been reserved for a small demographic of high-net-worth individuals or executives from corporate America with the desire to go out on their own. But lately that has started to change.

Franchises, especially lower-cost franchises and tech-based systems, have "discovered" Millennials. Despite a media-fed stereotype that Millennials are self-absorbed, avoid hard work and expect praise without accomplishment, franchisors who have worked with them have found many to be energetic, adaptable, smart and industrious.

"The tide has definitely turned, but even more so in the last few years," says Paul Segreto, CEO of the Franchise Foundry, a franchise development firm based just north of Houston. "In home-based and low-cost franchises, Millennials will make up 50 percent of new franchisees over the next two years."

Thanks to the Great Recession, the crumbling job market and changes in employment culture, Millennials are wary of corporate America and more interested in alternatives like franchising.

"Where I saw the tipping point was a few years ago," Segreto says. "Steve Wozniak from Apple was asked if there would ever be another Steve Jobs. He answered that normally he would say no. But after looking at the current generation of young people, he thought there would be more [innovators like] Steve Jobs and Bill Gates and Larry Ellison because there are so many in the younger generation who are unemployed or underemployed and have so much talent. But because of high real-estate and startup costs, it's hard to start an independent business. Millennials are looking for alternatives. That's where franchising fits in."

The International Franchise Association launched a program called NextGen in Franchising to educate Millennials about the industry, and franchise consultants have begun launching social media campaigns to attract the emerging demographic.

It took a few years for Lam to discover the value of this younger generation, but now he sees many advantages. "We really look at adaptability," he says. "Sometimes people who have been teaching for a long time don't want to make changes to their methods or follow our system closely."

However, Millennials (and their younger counterparts) tend to follow the Best in Class business model with fewer problems. Lam also appreciates their openness to new technologies. "Millennials are on their phones all day anyway, so if we release an app to help them run their business more efficiently, they say, 'Sign me up.' Sometimes an older franchisee will say that they want to keep using their spreadsheet to run their business. And that's perfectly fine, but it's nice for us to all be on the same page."

To attract Millennials, Lam made some concessions. Because so many younger franchisees are saddled with student debt, may have been unemployed for a long time and lack a nest egg, he set up several programs to help them financially. The company's Teacher Incentive offers a $3,000 discount off franchise fees and waives royalties for three months. Also, if a franchisee is doing well and wants to open a second or third unit but can't afford it, Best in Class invests 50 percent of the costs and gives its franchisees three years to buy the company out. "We have no intention to make money off the deal," Lam explains. "We just want these young, passionate franchisees to be able to grow."

Fresh start

Jonathan Barnett, founder of Oxi Fresh Carpet Cleaning, which has 270 units across the U.S., was born in 1980 and started his franchise system when he was 26. He hadn't thought much about generational differences, but when he started reading about Millennials, he says he was amazed how well the research summarized him and the majority of his franchisees, who are in the same age group.

"People who own Oxi Fresh franchises are highly motivated to own their own business but might not have the capital to build a McDonald's," he says. "They're adaptable and flexible and aren't tied down to traditional concepts."

In fact, Oxi Fresh seems tailor-made for Millennials. Not only did Barnett build the franchise system as a low-cost, tech-based company, but he also created a new proprietary system for cleaning carpets-one that is greener, cheaper and faster than traditional carpet-cleaning methods.

"In the beginning, I thought our best franchisees would be older, business-savvy guys," Barnett explains. "But it's been the younger guys who were able to get small-business loans who are kicking tail. It's been an eye-opening experience for me."

As a Millennial, he also knows what motivates his peers and is able to harness those qualities. "People say Millennials are lazy, but they can be passionate and work hard," he says. "They just have to believe in something bigger than themselves. Our younger franchisees are really concerned about using less water and saving the planet. The older generation doesn't seem as concerned about being green."

Oxi Fresh breaks from tradition in other ways, too. Instead of recruiting franchisees using coaches and brokers, which is standard in the franchising world, Barnett signed up 99.5 percent of his franchisees through internet-generated leads and referrals from current franchisees.

Like Lam, Barnett also found some weaknesses common among Millennials, and changed his system to address them. "Many Millennials seem less organized than our older franchisees," he says. "So we've really worked to systematize things, and we have a central booking service so they don't have to constantly answer their phone."

Taking some of the back-end duties off their plates also appeals to Millennials in other ways. Unlike other generations that were willing to work long hours, even the most ambitious Millennials are interested in maintaining a work-life balance. "We want our franchisees to be able to go to their kid's soccer game," Barnett says. "So we've built a structure where they can. We want that work-life balance to be a strength in our model, not a weakness."

Family business

Another trend among Millennial franchisees has them teaming up with their Baby Boomer parents. "Obviously, the employment situation for Millennials is not very pleasant," notes Terry Powell, founder of The Entrepreneur's Source, a Southbury, Conn.-based franchise and business consulting system. "With limited jobs and a natural drive for independence and stability, [Millennials have found] franchising an appealing career path. Many are convincing their parents to invest their 401k in a franchise venture with them. The parent can be an investor, mentor or partner, and bring along the experience and know-how from their career. It combines the stability and experience of the Baby Boomers with the drive of the Millennials."

It's something that the executives of Anytime Fitness have noticed. The company estimates that about one-third of its franchisees are Millennials, but more and more parent-child partnerships are emerging.

"We have one father and son who have opened 13 clubs together," says CMO Stacy Anderson. "The father's a Boomer who has a lot of business acumen, and the son was looking for a way to get into the work force. They've done extraordinarily well. It's a fascinating phenomenon."

Anderson says Anytime Fitness didn't set out to attract Millennials, but she believes she knows why the system appeals to younger franchisees. "It's not so constrictive that they can't find a way to bring their own personality into it," she says. "The idea of fun and a sense of play are really attractive to that generation. They don't have to sit at a desk and crank out reports from 9 to 5."

Meanwhile, working with Millennials has reinforced some aspects of Anytime's culture. "I think we have a really nice trifecta when it comes to Millennials," Anderson says. "We're in a great category, we have a great business model, a low-cost turnkey franchise and a culture that is tied into purpose and play. That's why we're seeing this trend. There's some serendipity involved, but we're taking advantage of it."

Taking charge

Trevor Kaftan, a 31-year-old Hudson Valley, N.Y.-based franchisee for N-Hance, a cabinet and wood-floor restoration franchise, says he always had an inclination to be his own boss. He sold Cutco knives during college, and became an independent owner for them afterward. He left that job to work at Sears in the home-improvement department, designing and selling kitchen-remodeling projects. When the recession hit, however, sales plummeted.

Kaftan read about N-Hance and thought resurfacing cabinets was a cheaper, smarter alternative to what he had been doing. Three years later, he owns three N-Hance units and employs eight people.

"I have lots of friends who got involved in some sort of business, and they're doing well, but people who went to law school or medical school are struggling," he says. "I have a friend who earned a master's from Georgetown and is just exceptionally smart but doing temp legal work in New York. I think a lot of us saw what our older siblings went through, and we're not going to sit around waiting for the right opportunity. We're going to create it for ourselves."

New dawn

Creating those opportunities will keep getting easier as the franchise world realizes the potential of Millennials. Andy Bell, CEO and president of Lakewood, Colo.-based Handyman Matters, recently discovered that his top franchisee was only 29. "It opened our eyes big-time," he says. "Once we saw that, we realized we shouldn't discount someone because of their youth. We should celebrate and recruit them. We stumbled across it, but now we're going after it."

In fact, Handyman Matters' lower-cost system, with its focus on technology and support, is a perfect fit for young businesspeople. As a result, the company is making social media and recruiting Millennials part of its marketing platform going forward.

"It's a calculated risk going into a franchise," Bell says. "But Millennials are young enough that they have an attitude that everything is recoverable. They are not averse to risk. They take the caution out of running a business. They're becoming wildly successful because they don't pause when making critical decisions."

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Why Millennials Are Becoming Franchisees

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10 min read This story appears in the March 2015 . Subscribe " Around the office, Hao Lam is known as "the old man." By franchise-industry standards, the 47-year-old owner of Best in Class Education Center represents a fairly average age. But Lam's COO is only 27.

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Young entrepreneurs see big opportunities in franchising

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As owner of a Pita Pit franchise in Oakville, Ont., Hailey Nault is among a growing trend of young entrepreneurs buying franchises instead of pursuing more traditional routes of education and employment.

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Thomson Reuters Accelerate SME MENA | Free Small Business Resources

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The go-to resource for startups and small business owners in MENA. If you're looking for advice, community, financing, workflow software or business services, the Accelerate SME Country platform has got you covered - and it's completely free!