Franchisors, beware of providing earnings predictions and be ready to back them up: the Gelare lesson

Many franchise lawyers have, for many years, advised their franchisor clients not to provide any earnings estimates to potential franchisees.  Furthermore, the advice has always been that if any earnings predictions are made by the franchisor, they must be based on the real data through a process of examining all variables and only making assumptions which can be derived using maths and formulae.

Last month ice cream franchise chain Gelare International Pty Ltd learned an expensive lesson – up to the value of $788,980 plus legal costs.

The franchisor was brought to court by a part franchisee, Palis Victoria Pty Ltd, alleging misrepresentation and unconscionable conduct under the Trade Practices Act 1974 and under the Fair Trading Act 1999 (Vic). The issue of costs is still to go before the judge at the end of this month.

There are many facts, written communications between the parties and arguments about what has transpired during the relevant time periods in the case. Arguments took place about what exactly was represented to the franchisee by the franchisor at the time the franchisee was considering joining the franchise.

However, the nuts and bolts of the case involve an allegation, which was accepted by the judge, that an estimated revenue prediction made by the franchisor to the Forest Hill Chase franchisee greatly exceeded the amount which the franchisee was able to earn. 

When the franchisee stopped operating the outlet and the franchisor took over running it as a company store, the earnings made by this store were a great deal lower than the prior representations. 

A major factor of this case was that the franchisor did not have any proper basis or scientific calculations as to how the represented financial figures were derived.

On the balance of facts and evidence presented by all parties to the proceedings, Justice Riley held that Gelare misrepresented potential earnings, thus inducing the franchisee to enter into the franchise relationship and in doing so acted unconscionably.

This case sends a very strong message to all franchisors. 

Do not provide estimated earnings or other financial figures to potential franchisees unless and until these figures have been derived through a proper process, backed up by evidential trail and scientific calculations based on actual data. 

As Peter Buckingham, managing director at geodemographic firm Spectrum Analysis, advises “If you do wish to pass on sales estimates for a site, invest the money in a proper process with experienced statistical consultants, as the cost will be a fraction of the cost of the dispute and the damage to the brand you will have in any case similar to this.”