Franchise Disputes

Unfortunately, franchise disputes occur more frequently than you might think.

Investors in franchise arrangements are buying into proven success that will yield proven returns they hope they can improve with hard work. What happens when it doesn’t turn out as expected?

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Common complaints that lead to litigation

The two most common forms of complaints – relating to location; takings; and the unreasonableness of franchise fees – befall even the most experienced franchisees.

Buying into a supermarket franchise for example with an 18 months only lease on an established business has risks especially when the lease is in the franchisor’s name and it is responsible for renewing it at option time. This puts franchisee’s right to carry on the business essentially at the pleasure of a franchise owner.

Different location risks relate to start-up businesses where franchisor selects a new location.  Often this is part a promise to find “the right location, a secure lease and high standard equipment”.

It might be easy enough to secure a lease and provide equipment but “right location” is always uncertain. Long standing traffic diversions away from a suburb’s main thoroughfare in which a Blow Dry Bar franchise was located and the absence of nearby commercial buildings for a customer catchment, brought on a quick financial end for the luckless franchisee.

Franchisor projections often do not materialise into franchisee revenue. Overstating of “profitable” revenue even when others are complaining of not reaching their breakeven turnover, it is regrettably not uncommon.

“Hypothetical” and “historical” sales performances even if labelled “should not be relied upon as anything more than an indication of what you might expect” can nevertheless be a representation as to future matters.

To succeed on that ground franchisee has to convince the court that the franchise or lacked sufficient grounds for making the “battle data” pitch at the time the figures were provided to him as required by Australian Consumer Law s 4.  See Customers and Suppliers

Some claims that have been made and the courts responses to them, are as follows:-

  • “one of the most lucrative franchise systems in the southern hemisphere” – no basis whatsoever for claim
  • “we have already established 16 ‘profitable’ (usually within one month) niche cash flow positive franchises” – turnover overstated, several existing franchisees not achieving breakeven figures
  • “become part of a ‘thriving business model” – untrue
  • “feasibility studies are ‘so good he could put three outlets into the territory”’- study entailed an internet search to estimate competitor numbers a short visit there to call on a number of businesses
  • “profitability proven by a mathematical formula” – an unsubstantiated assumption that 350 local businesses would support one outlet.

Franchise relationships carry many such risks but just because a business fails doesn’t mean the franchisor is at fault or that the franchisee is entitled to compensation.

Such claims require careful and meticulous investigation to determine exactly what was said when by whom. Projections and historical data need to be analysed carefully, usually by forensic accountant in order to make out the franchisee’s case. Then the court has to be convinced that the franchisee relied upon for example, in the accurate projections other promises.

Secure a safe pair of hands for your claim’s investigation. The art of disputation is in the preparation of your case and its science is in the successful negotiation of your compensation entitlements.

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