IMMIGRANTS FACE ECONOMIC CHALLENGES
Understanding legal issues one of the risks in buying franchise
Steven Goldman hears a lot of horror stories about the world of franchising. As one of Canada’s prominent franchise lawyers, he sees a lot of immigrants who come to Canada to “buy a job” by purchasing a franchised business.
One such client recently got into a fast-food business with the expectation of earning $1 million in revenue and $200,000 in profit in his first year. But there was a $25,000 upfront franchise fee, plus a 6% royalty, a 2% national advertising fee and a 2% local advertising fee. Ten per cent right off the top killed any chance of turning a profit.
“Immigrants … are led to believe these [franchise agreements] are standardform agreements or that it’s non- negotiable,” says Mr. Goldman, of Goldman Hine LLP, adding that’s not always the case.
Among the challenges facing immigrants are a lack of understanding of how these agreements work in Canada, poor English skills (which doesn’t help their understanding of the fine print in a 250-page disclosure document, if they’re even given one) and a tendency to buy into unproven franchise systems, perhaps startups with fewer than 10 locations.
They also tend to rely on word of mouth from people in their community, which skews certain segments of the franchising world toward a particular ethnic group, Mr. Goldman says.
Some examples he gives are that Koreans seem to gravitate toward convenience and small grocery stores, owning 27% of all independent convenience stores in Ontario. Iranians and Iraqis tend to buy pizza shops and Filipinos are attracted to deli chains, he says.
But relying solely on one’s community can give a false sense of low risk. Because a friend or a family member was successful at one particular business doesn’t mean the new immigrant is going to be profitable in the same type of franchise. Each franchise opportunity needs to be scrutinized and evaluated on its individual merits.
“A lot of [immigrant franchisees] don’t realize what they’re getting themselves into,” Mr. Goldman says.
And it doesn’t help that rules vary between provinces as to what disclosure is required from the franchisors to prospective franchisees. Ontario, Alberta, New Brunswick and Prince Edward Island currently have franchise legislation in force, while the others do not. Manitoba has enacted franchise legislation that will come into effect Oct. 1.
Then again, the issue of disclosure mandated by these franchise laws may not always make a material difference, Mr. Goldman notes. “The disclosure requirement doesn’ t really give that much information as to the risk of a particular business,” he says, adding defining a “successful” franchise operations is such a subjective terms that could be measured in so many ways, it can often leave the inexperienced or immigrant buyers confused about how to judge the value of any given system.
Lorraine McLachlan, president and chief executive of the Canadian Franchise Association, agrees language skills are often a key barrier for new Canadians — whether operating a franchise or any other type of business.
“If you’re having language difficulties at the interview stages, the early stages, you’re going to have trouble running that business or any business,” she says, citing front-line contact with employees, customers and suppliers.
Any new immigrant to Canada should develop a suitable level of proficiency in English or French to increases their likelihood of success.
At a recent industry event, a young man expressed interest in a particular brand, that he says were not very accommodating to his language skills. Her response, she says, was they were probably doing him a favour.
“For a franchisor to try to accommodate the different native languages of all their franchisees would be extraordinarily difficult,” Ms. McLachlan says. “When it comes to language issues, a new Canadian who does not have a strong grasp of English or French … is going to run into some challenges.”
Since Canada is a multicultural and multilingual country, she says, it is common for franchisors to work closely with well-qualified immigrants to develop their English or French skills, but there is a limit as to what is reasonable to expect from a franchisor.
It is in the franchisor’s best interest to ensure franchisees are set up to succeed in their ventures.
Ms. McLachlan says one reason immigrants are attracted to franchising opportunities is having those support systems in place, so they aren’t starting a new business venture from scratch with nobody to turn to when problems arise.
“Simply because something is franchised doesn’t mean that it has a proven system,” Mr. Goldman counters.
As with anything in business it’s buyer beware, Ms. McLachlan says. But she still maintains: “For a new Canadian, the franchise system helps them succeed in the Canadian business climate and culture without having to invent all the steps. It’s an extremely positive opportunity for newcomers to Canada.”