If you make sales predictions for your Franchisees and really cannot justify those numbers, be prepared to add “Your Honour” to the end of every sentence you make. Gelare International has just found that out. As much as they felt they had done “the right thing”, the Federal Circuit Court and Judge Riley totally disagreed.
This is another case that should highlight to Franchisors that they need a process and sales prediction tools if they are going to make any statements to their potential Franchisees.
In a sensational decision in the Victorian Supreme Court, 3 Judges reversed a decision previously in favour of Franchisor Billy Baxters (Franchising) Pty Ltd, and awarded $1.22M damages to the former Franchisees of the Glenelg site. The details of the original case and the Appeal revolve around what representations were made to the Franchisee by the Franchisor's representative, in what was said in telling the Franchisees the location should turn over $1.3M back in 2004. His estimates were found NOT to be based on any research or facts, but rather an opinion he had come to, having thought he knew the correct sales of the Norwood store (found to be incorrect).
I have campaigned for years that the wet finger in the air approach is NOT good enough, and for once I feel fully justified by the Appeal decision. In opening Greenfield sites, you MUST have some logic if you are going to make such statements to potential Franchisees. While most Franchisors do not make any claims, it still must be extremely important for the internal workings of approval of a greenfield's location, that the Franchisor has taken reasonable steps to make an approval decisions for a new site.
In probably the biggest case since the Lenards cases, the complete opposite occurred to Lenards with this Appeal. Lenards lost the original case, and had the decision reversed in their favour on Appeal. In this case the Franchisor won the original case ($250K plus costs), which has now been reversed and "quintrippled" to be $1.22M to the Franchisees.
For a more detailed assessment of the case, please read the attachment by Tony Garrisson, Partner of HWL Ebsworth Lawyers.
Peter Buckingham reported on Billy Baxter case
Published in the Business Franchisor Oct 2012
A recent decision in the Supreme Court of Victoria should be sending some franchisors into shock, and give some current or ex franchisees a sniff that justice may be in the air, in certain circumstances.
In a unanimous decision, a previous decision was reversed into the franchisee’s favour, with $1.22M damages awarded.
The case revolved around the Glenelg Billy Baxter’s restaurant, which was opened in 2004. The franchisee claimed he was told sales should be around $1.3M, and this definitely did not eventuate.
For many years we have campaigned that some franchisors apply little logic to the most important number in a new site evaluation – The Sales Revenue Forecast. Whilst we deal in an ‘inexact’ science, history has shown that some data based evaluation will always be better than the ‘wet finger in the air’ estimate, and if challenged, there should be some statistical base from which the Sales Forecast was derived.
Peter Buckingham is the Managing Director of Spectrum Analysis Australia. He is a certified Management Consultant, and a Fellow of the FCA and IMC.