Is buying a franchise the opportunity of a lifetime, or the worst mistake you’ll ever make?
by Max Fawcett
It was time, Patric Rockley decided. He was in his mid-40s, and had spent the last 17 years working in management for franchises in the food-service industry. He knew the business. He knew he wanted to work in it. And most of all, he knew he didn’t want to work for someone else any longer. With a mortgage that was four years from being paid off, he had enough capital built up to do something useful with it. “I’d decided, with all my years of working for franchises, that I should own a franchise,” Rockley says. “And I didn’t want to buy my own place – I wanted to buy a franchise so there was that structure and support.”
Photograph Ryan Girard
He was working at a Cobb’s Bread location in Sherwood Park at the time, and they’d approached him about buying one of their franchises. He’d even been to the bank to explore what the financing would look like. But, he thought, he owed it to himself to consider what else was out there. And what he found was a brand-new franchise concept out of Ontario called Fulton Market Burger. He knew it was a risk compared to the other, more entrenched concepts. But he also knew that the company behind it, a Toronto outfit run by Ted Tsanas and Leo Kanaridis called Big City Concepts, was offering him an awful lot of enticements: an initial six month franchise royalty holiday, a flat franchise fee of $350 a week for the next six months, exclusive territorial rights to Sherwood Park and the waiving of the company’s three per cent national advertising fee until they opened five or more units in Alberta. And he felt the idea of a premium burger joint in Alberta – even one without a track record – made sense. “It was a risk, because there was no history,” he says. “They couldn’t really give me any figures about what sales or profits would be. But I looked at the menu and the concept and I thought, ‘This will work.’ ”
It didn’t. And while it didn’t help that his Fulton Market Burger location opened in February of 2009, with oil still trading below $40 a barrel and the global economic crisis looking like it might never end, it quickly became clear that the problems with the company were about more than just the macroeconomic conditions. Within six months of opening, he was hearing rumblings from fellow franchisees in Ontario about issues within the company. The sales weren’t matching up with the ones that had been projected by the franchisor, and, more troublingly, the food costs were higher than they’d expected. He was dealing with the same issues, and decided to change up some of the suppliers he was using – in particular, the ones that provided his patties and his buns, the cornerstone ingredients of a burger restaurant. And while the franchise agreement technically prohibited that (in large part because the owners were getting rebates from the suppliers), they didn’t stop Rockley from experimenting. “I said, something has to be done. The answer was ‘Well, since you’re out in Western Canada and you’re the only one out there, I guess so. But don’t tell the others.’ ”
As it turned out, it probably wouldn’t have mattered if he had. The original location in Toronto where he’d received his training went out of business within a year, while two other Toronto-area locations went under soon after. It got ugly in a hurry, too, as the franchisee at that same location moved the equipment out in the middle of the night and threatened to sue the company owners. When Rockley got a call from a collection’s agency threatening to repossess his Nieco broiler (the most expensive piece of equipment in his restaurant’s kitchen, and one that he had the receipts to prove he owned) and was served by the contractor who built his restaurant but hadn’t been paid the $71,000 it was owed by the head office back in Toronto, he discovered that things were even worse than they seemed: Big City Concepts was going out of business. He decided it was time to do something drastic.
First, on the advice of his lawyer, he settled with the contractor, paying him upwards of $50,000 in combined damages and legal fees. “When I talked to my lawyer he said that the other two guys [Tsanis and Kanaridis] had claimed bankruptcy, and he’s not going to get a dime out of them. If it goes to court, the judge is going to say someone has to pay this guy – and the only person that’s making money off his work is you, because you’re in operation.”
This wasn’t, to put it mildly, how Rockley thought his first year in business would go. “The other locations are closing, I’m being sued and we’re not making nearly the profit we were promised. Sales were pretty good, but we weren’t making any money.” With the cost of buying the franchise and related fees, he was already in for a combined $325,000, and when the last remaining location went under, he decided it was time to do something before he ended up in the same situation. “It was when the last one closed in Ottawa when I said, ‘That’s it, I’m out of here.’ ”
Rockley went to his lawyer and had him draft a letter dissolving the franchise agreement on the grounds that they were in breach of contract, and while Tsanis and Kanaridis disputed that fact, Rockley never paid them another dime – and never heard from them again.
The Fulton Market Burger concept may have been a particularly spectacular failure, but failure isn’t unheard of in the franchise business. That’s something that Lorraine McLachlan, the president and CEO of the Canadian Franchise Association, thinks more people need to understand. “I can’t begin to tell you the number of people that I speak to who think that going into a franchise is like buying a GIC – that it guarantees a six per cent return on investment,” she says. “That’s not what it is. You’re getting an opportunity to run a business that, in many cases, has an established track record.” And that opportunity, she says, requires the prospective franchisee to be ready to work hard. “A franchisee who succeeds spectacularly well – I guarantee to you, they are putting in the time to run their business.”
They also almost certainly have a good working relationship with their franchisor, something that McLachlan thinks is crucial to any successful franchising business. “You really need to get to know the franchisor, because at the end of the day, what we’re talking about in a franchise is a business partnership,” McLachlan says. “It’s a long-term relationship, and you want to like and respect your partner.” That’s not something that’s easy to quantify, but McLachlan says there are some key qualities every franchisee should look for. “A great franchisor is a good teacher. In a smaller organization, that may be the one, two or three individuals that formed the brand. In a larger organization, that’s the corporate management team.” You don’t have to depend solely on your own judgment, either. “You are going to want to talk to some other franchisees who are in the system. That information is provided to you in the disclosure document, and that’s where you can have conversations about what the franchisor is like to work with.”
Even if everything checks out, McLachlan says, aspiring franchisees should still take that disclosure document to a lawyer (one with particular experience in the field of franchise law) before they sign on the dotted line. Richard Stobbe, an associate with Calgary’s Field Law, has represented both franchisors and franchisees in the past, and says it’s best to do the work upfront to avoid misunderstandings – or conflict – later on. What should they look for? Hidden fees, for one thing. “What franchisees often have to watch for is hidden costs buried in the franchise agreement that they may not really be aware of from the sales pitch. That doesn’t mean the franchisor is trying to pull a fast one – it just means that it may not be thing they were thinking of at the beginning.”
And while most franchisors will present their product as a complete package – often marketing it as a “turnkey operation” – Stobbe says that doesn’t have to be the end of the conversation. “There are many franchisors who say it isn’t a negotiable agreement – that it’s a take-it-or-leave-it proposition. But depending on the franchise, and depending on the situation, there are often some clarifications that can be made, some negotiation that takes place.” And even if the franchisor won’t budge, it’s still a good idea for a franchisee to take it to a lawyer to understand what their rights and obligations are. “Even if it truly is set in stone and the franchisor is not prepared to negotiate the terms, at a minimum the franchisee should know what they’re getting themselves into and go in with their eyes open.”
Patric Rockley insists that his eyes were open when he went into business with Big City Concepts, but that didn’t do him much good in the end. After severing his ties with Big City Concepts and its Fulton Market Burger brand, Rockley rebranded his restaurant as BurgerWorks and poured tens of thousands of dollars – dollars he raised in part by taking out a second mortgage on his home – into changing the menu, developing a new logo, doing marketing and communications and establishing new relationships with suppliers. By late 2011 the restaurant was reopened, but the changes just weren’t enough to pull it out of its death spiral. “It probably could have been turned around with a second location and someone who had some money to brand it and expand it,” Rockley says.
But he didn’t have that money, and with sales still in decline and his costs rapidly mounting – he says he didn’t pay himself at all in the last year – Rockley decided to put it up for sale. “We advertised, we tried to find some partners, we tried to find investors, and time just ran out on us.” He had some interested parties, including one who, ironically, thought it would make a good franchise concept in its own right. But in the end, with six years left on his lease and no end to the struggles in sight, he had to walk away from the restaurant. If there’s a silver lining, he says, it’s that he was able to pay out most of his smaller suppliers before turning the keys over to the landlord. “I really wanted to make sure I did that,” he says.
The restaurant officially closed in early 2013, and while he has a new job – as general manager of a Starbucks near West Edmonton Mall – the now 50-year-old Rockley is still paying the price for his decision to open a Fulton Market Burger franchise. Because he refused to declare bankruptcy – “I didn’t want that on my personal history,” he says – Rockley owes the bank upwards of $110,000. “For the next five years I’m paying off a restaurant that I don’t own anymore.”
And yet, whether it’s hubris, determination or just plain foolishness, he says he’d do it all again if he could – and still might one day. While the experience – which, all told, cost him half a million dollars – may have been a negative one, he says it wasn’t all bad. He and his wife both learned plenty about how to run a business, be it accounting, marketing, procurement or human resources. Rockley likens it to getting two very expensive MBAs. His family grew closer during the time they worked together, too, and he misses working with the team he built at the restaurant. Most important, perhaps, Rockley misses being his own boss. “It seems stupid,” he says of the fact that he’s still interested in owning a franchise, “but I love working for myself. I don’t think anyone really gets that rich working for someone else. And I like being an entrepreneur, a risk-taker.”
Patric Rockley’s experience buying a franchise didn’t turn out the way he hoped. Here’s how you can minimize your own odds of failure.
- MIND YOUR MARGIN OF ERROR
Rockley was able to buy his Fulton Market Burger franchise, but only with significant help from the bank. In retrospect, he says, that was a mistake. “I didn’t have enough money to get into it. Even though I had the equity in the home, that wasn’t enough. You have to have extra money to fall back on.” Because he didn’t have that safety net to rely on, he wasn’t able to capitalize on the success he had with BurgerWorks, a concept he says had plenty of potential. “If we could have hung on a couple more years, it would have been a great location.”
- LOCATION, LOCATION, LOCATION
A good location is crucial to the success of any new franchise store, and while Rockley eventually managed to build a following for his Sherwood Park store, it was a tall hill to climb. And if you do have a good territory, make sure you read the franchise agreement and know what rights the company has to encroach on it. As Field Law’s Richard Stobbe notes, while franchisees are often given the right of first refusal on a new location in their territory, most don’t have the means to take it up. “The franchisor may still have rights to put in a new location if they give 30 days notice,” he says. “But in 30 days, a lot of small startup mom-and-pop franchisees just don’t have the capacity to take on a whole new location. So even though it looks good on paper that they have this 30-days’ notice period, in practical terms they’re just not going to be able to take it up.”
- BE A SKEPTIC
The sales package may make it seem like a franchisor is in business to help you make money. They’re not. Sure, their success is contingent upon the success of the franchises, but they’re not running a charity, and they’re not about to put your interests ahead of their own. Understand how they make their money, Rockley suggests, and you’ll have a better shot of making your own. And this is critical: just because you’ve worked in a particular industry doesn’t mean you necessarily understand its intricacies. Rockley, for example, didn’t realize that the agreements that the franchise had worked out with suppliers included rebates that flowed back to the franchise, not the franchisee, or the effect these would have on his profit margins. “I’d been a manager, but I’d never been an owner, so I didn’t know about rebates.”
- JUDGE A BOOK BY ITS COVER
When assessing a potential franchise arrangement, pay close attention to the disclosure document. And don’t just focus on the numbers, either, although those are important. Pay attention to the level of detail, the depth of explanation and even the appearance. The disclosure document is a tell, and it might be your best – or even last – Chance to back out before it’s too late. “That really is a good yardstick to measure the franchise,” Stobbe says. “If they haven’t got a franchise disclosure package, or if they do and it looks sloppy or out of date, that’s an indicator of what kind of franchisor it is.”
For more on what you need to know before you get your franchise going, click here.