Franchisees of cafe chain win damages for incorrect estimates of turnover

A franchisee couple has been awarded $1.22 million in damages after a successful appeal against franchisor Billy Baxter’s, prompting an expert to highlight the importance of site selection.

Billy Baxter’s, which began franchising in Adelaide in 1992, is a chain of licensed coffee houses, cafés and restaurants, with distinctive décor featuring a cartoon character named Billy.

Ross and Sue Pollard operated a Billy Baxter’s greenfield site in the Adelaide suburb of Glenelg, but did not achieve the turnover anticipated by the franchisor’s representative, Phillip Mauviel.

Mauviel anticipated a turnover for the business of $1.3 million, and suggested turnover would allow the business to pay the rent and return a profit.

These representations – made during the course of negotiations for the site at Glenelg – drew comparisons with an existing Billy Baxter’s outlet in Norwood, another Adelaide suburb.

However, the Glenelg franchise suffered losses, which meant the franchisees were unable to pay the fees due under the franchise agreement. They then terminated the franchise agreement.

The franchisor accepted their termination as repudiation of the franchise and proceeded to pursue legal action to recoup the outstanding fees.

The franchisees denied the claim and counterclaimed on a range of matters, including that they had been induced to enter into the franchise agreement by the misleading and deceptive conduct of Mauviel.

The original judgment found in favour of the franchisor and highlighted that Mauviel had provided a spreadsheet template.

It also found the franchisees ignored advice to enter their own information into the spreadsheet, and to seek independent legal, business and accounting advice.

However, a Victorian Supreme Court of Appeal decision has found there were no reasonable grounds for Mauviel to make the representations regarding turnover.

According to Jason Gehrke, director of the Franchise Advisory Centre, there are lessons for both franchisees and franchisors to take away from this case.

“Franchisees should undertake effective due diligence, no matter how sophisticated an investor that may believe themselves to be,” Gehrke says.

“They need to seek out independent advice on the information provided by the franchisor.”  

Gehrke says the lesson for franchisors relates to site selection.  

“They need to ask themselves a fundamental question: ‘Would we ourselves put a business in this location?’ If the answer is yes, they can take comfort in that being a well chosen and viable site,” he says.

“But if they’re not prepared to answer, then they shouldn’t put franchisees in that location.”

Gehrke says the Billy Baxter’s case highlights the importance of having a robust and stringent site selection process, backed by “good science and research”.

“That should be part of any franchisor’s operations… You don’t want to have underperforming businesses because they’re poorly chosen outlets,” he says.

“That creates such a strain on the franchisor’s resources in trying to support those franchisors.”

Gehrke says poor site selection is often the result of insufficient or incorrect processes.

“Sometimes, that might come down to the fundamentals of what makes a business work,” he says.

“Many start-up entrepreneurs and start-up franchisees do fluke it – they get a great location – but they don’t know all the factors that continue to make it great.”

“Is it just visibility or pedestrian count or the nature of the people walking past? Is it the impact of neighbouring businesses or the availability of car parks?”

“These are the sorts of factors that franchisors need to consider when determining what should be a high performing site.”

“If there is not enough consideration as to what makes a good site, and identifying all those variables, then mistakes can be made.”

This article first appeared on StartupSmart.