L-R Prit Dutta, Pie Face franchisee, out the front of his Pie Face store in Brisbane alongside former Pie Face franchisee Aleks Trajceski.
The looming court action against franchise group Pie Face shows why it’s important for prospective business owners to be sceptical about business projections from franchise groups and scope them out carefully before buying in.
The lawyer for three disgruntled Pie Face franchisees, Fred Potgieter, told The Australian Financial Review the group’s problems were “systemic” and the Federal Court case could become a class action.
A number of franchisees claim they have collectively lost millions from buying into the food franchise. Prit Dutta, a former IT executive, told the AFR his business figures were “totally different” to those that Pie Face projected.
Pie Face disputes all the claims and said it has not provided any misleading or inaccurate cost information to its franchisees. Chief executive Wayne Homschek said franchisees themselves had the biggest influence on their costs owing to the way they ran their business.
Jason Gehrke, director of franchise consultancy the Franchise Advisory Centre, says prospective franchisees often underestimate how much due diligence they should perform before buying into a long-term relationship with a franchise group.
“My recommendation for a first-time business owner, and especially for a first-time franchisee, is for every $1000 to be invested in the business they should spend an hour of their time researching what they’re getting into. A $200,000 business is 200 hours, that’s five weeks of full-time work.”
During that time the newcomer should “test every single assumption that is being presented to them”, including how many people are estimated to come into the shop and the average sale amount and volume.
“All of those have to be tested by primary and secondary research. Primary is sitting outside a shop and counting the number of people going past. Spend some time working in one of the outlets, and do it without pay. Secondary is talking with existing and former franchisees and reading what has been published about the group.”
“If you come to the conclusion you won’t make any money out of it, you have lost five weeks of your time, but you haven’t lost 200 grand.”
While making clear he is not commenting specifically on Pie Face, Gehrke said rapidly growing franchises sometimes compromised the quality of their offering, such as by not carefully selecting franchisees or by getting their projections wrong.
“I often see comments or statements from new or growing franchise systems to say they will have X number of outlets by such and such a date, and then in hindsight the date has passed and the outlets haven’t materialised. It’s often a trait of entrepreneurs who become franchisors that their eyes can be a bit bigger than their stomachs.
“Any projections that are given out should be disclaimed accordingly and any potential franchisees should never accept those as gospel.”
Pie Face has 80 outlets around Australia and in New York and is considering a float this year.
Stephen Giles, a lawyer and deputy chairman of the Franchise Council of Australia, says the case would come down to its particular facts.
“The law is there to protect franchisees if a franchisor makes projections and they turn out not to be made on reasonable grounds,” Giles says. ”But by the same token, the operator is probably the single most important determinant of revenue.”
“That is why franchisors typically do not make representations like these because it’s almost impossible to prove with the benefit of hindsight that you had reasonable grounds for making them.
Disputes between franchisors and their franchisee owners are common, particularly over expectations about how much money an outlet is likely to generate. A group of ten former Bank of Queensland franchisees are seeking damages due to business losses in the NSW Supreme Court, claiming BoQ made promises over business and revenue that did not eventuate.
The case follows a failed attempt by former BoQ franchisee Leicester Ramsey, where Justice Robert Buchanan found the bank’s alleged claims about monthly revenue were not a representation that could be relied upon.
“At no time was an assurance given that the franchise they proposed to establish, whether at Campbelltown or anywhere else, would succeed in achieving the target volume of lending or that the franchise model would necessarily deliver such a result,” the judge wrote in his 2010 ruling.
“On the contrary, both explicitly and by necessary inference, the bank indicated that this was a matter for assessment by them.”