Mills Oakley Lawyers on recruiting franchisees

Do you or your agents ever give prospective franchisees:

• projected turnover figures?
• advice on site selection?
• recommendations or advice on the appropriateness of rent in relation to greenfield sites?
• comparative information between the proposed site and other stores in the network?

If the answer to any of the above questions is “yes” then we recommend you review your current practices as a result of a recent Victorian Court of Appeal decision of Trans-It Freighters Pty Ltd v Billy Baxters (Franchising) Pty Ltd. This case highlights the risks involved in providing such information to prospective franchisees.

Facts
In brief, the case concerned a former franchisee of the Billy Baxter franchise (Franchisee) who agreed to enter into a franchise agreement based on statements made by an agent of Billy Baxters (the franchisor) during the course of negotiations for a greenfield site at Glenelg in South Australia.

The agent made representations to the Franchisee about the reasonableness of the rent for the premises and the turnover potential of the business, indicating the business would turnover $1.3 million in the first year of operation. The agent also made comparisons between the turnover of the proposed site and other outlets in Australia, including his own Billy Baxter franchise at Norwood Parade, South Australia.

The Franchisee commenced operating its Billy Baxter franchise but the business was not successful and not only did not achieve the anticipated turnover, it suffered ongoing losses. The Franchisee was unable to meet its financial obligations under the franchise agreement, including payment of service fees and advertising expenses.

The franchise agreement was terminated and Billy Baxters commenced proceedings to recover unpaid amounts from the Franchisee. The Franchisee counter-claimed for damages for loss incurred as a result of opening the franchise business based on misleading and deceptive conduct by Billy Baxters’s agent.

Decision of the Supreme Court of Appeal
The Victorian Supreme Court of Appeal found the agent did not have reasonable grounds for making representations to the Franchisee about turnover or rent and those representations induced the franchisee to enter into the franchise agreement.  Damages in the amount of $1.22 million were awarded to the Franchisee.Some practical lessons arising from the Case.

Given the decision of the Court of Appeal, Franchisors (as well as their recruitment consultants, representatives and agents) should:

• exercise caution when recruiting franchisees;
• not make any representations to a franchisee unless they have reasonable grounds for making those representations;
• keep detailed records of conversations and statements during negotiations;
• not provide franchisees with projected or forecast sales turnover;
• only provide actual historical data from the entire network;
• explain in writing the purpose of giving historical data to franchisees and the importance of the franchisee obtaining advice from their advisers so they can make an informed decision on whether to enter into the franchise agreement;
• actively encourage all franchisees to seek legal, financial and business advice before entering into a franchise agreement;
• use a questionnaire to request franchisees confirm whether they are entering into the franchise agreement based on any representations or promises made to them by the franchisor or its agent before entering into the franchise agreement; and
• review their documents and procedures in relation to site selection and ensure that they do not make any statements which may induce potential franchisees to buy a franchise based on representations which are or may be misleading and deceptive.

If you are concerned about your current processes, now is the time to review them.  Mills Oakley has significant expertise in preparing and reviewing recruitment processes that minimise risk.  We can assist you by reviewing your current documents, practices and procedures and providing cost effective advice on improvements.