A recent Victorian Supreme Court decision that has awarded $1.2 million in damages to a franchisee of an unsuccessful outlet of coffee and restaurant franchise Billy Baxter’s contains serious lessons for both franchisees and franchisors.
First of all, the case was an appeal, which overturned a previous decision that required the franchisee to pay more than $250,000 in outstanding royalties and marketing levy contributions incurred over a period of almost two-and-a-half years.
During this time, the franchisee continued to operate their Billy Baxter’s franchise at Glenelg in South Australia despite not paying royalties, until they finally terminated their agreement in May 2007.
There are key lessons for both franchisees and franchisors in this case. These include:
1. Never be pressured into a site by anyone
The franchisee’s claim against the franchisor for misleading representation hinged on a comment made by the franchisor’s recruitment officer about the turnover expected for the site, and a benchmark ratio of rent to turnover.
Unfortunately, at the time, the property’s landlord was applying pressure to the franchisor and franchisee to commit to the site, which resulted in the franchisee signing the lease agreement even before they had signed the franchise agreement.
It is clear from the judgement that the franchisor did not have a policy of holding head leases, and once the franchisee had agreed to the site, they were still under no obligation to Billy Baxter’s at the time and could have used it for something else.
2. Enthusiasm is not a substitute for due diligence
The franchisees of the Glenelg outlet had noted in the proceedings that they had always believed a Billy Baxter’s restaurant would be a perfect fit for Glenelg, which is a popular tourist and dining suburb on Adelaide’s outskirts.
Their enthusiasm for the outlet was obvious in reading the judgement, and the franchisor’s recruitment officer assumed that because they also currently owned a Boost Juice, they knew what they were doing. In reality, the franchisees undertook no detailed research as to the suitability of the site they would occupy.
3. Always get legal advice
The franchisees chose not to get legal advice before signing their franchise agreement, and advised the franchisor in writing accordingly. Franchisors who grant franchises to people who do not get proper legal advice beforehand risk litigation at one end of the scale, and excessive questioning and support demands at the other as franchisees fail to understand what they are getting themselves into.
For this reason alone all franchisees should always get advice, and all franchisors dealing with people new to their system should insist on legal advice as a condition of granting the franchise.