Disgruntled Pie Face franchisees threaten legal action against the successful pastry seller. But the boss tells SmartCompany's Patrick Stafford tough conditions have just separated "the men and the boys".

Three franchisees from the fast-food chain Pie Face are threatening to sue the company for millions of dollars, claiming they were misled with regard to both cost and profits when they first bought into the business. But founder and chief executive Wayne Homschek is standing firm.

“All I can say is that we’re in the business of franchising, and not everyone is going to be a good franchisee,” he told Crikey sister site SmartCompany this morning, denying the allegations and pointing to a tough 2012 for food-based companies. “Not all of them are going to make the business what it could be.”

A trio of franchisees — Prit Dutta, Aleks Trajceski and Tom Bulmer — say they collectively missed out on $2 million after buying into the company. Pie Face has 80 stores in Australia, and has recently expanded to New York.

“After seven or eight months when I looked at the figures, they were totally different to what Pie Face projected for us,” Dutta told The Australian Financial Review. “We lost faith.”

The trio’s lawyer, Fred Potgieter of Thomsons Lawyers, was unavailable to comment but told the AFR Pie Face “could not provide us with any information whatsoever on what is the reasonable basis to make their predictions”: “We are not just talking about the odd exception in terms of a franchisee experiencing problems. It’s a systemic problem.”

The accusation is not uncommon among franchisees. The Australian Competition and Consumer Commission receives similar complaints every month, with disgruntled franchisees claiming they were misled as to the capacity for earnings. In a recent controversy a Victorian court awarded one franchisee of restaurant chain Billy Baxter’s $1.3 million in damages after the parent was found to have paid based on incorrect estimates of turnover.

Homschek says it’s unrealistic to expect every franchise to do well. Same-store sales have declined across the network, he says, even though the average sale price has increased.

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“This year has been a tough market; we’ve had a pretty rough time. We’ve seen a lot of slowdown in the economy, foot traffic is done, and franchisees are working harder to get customers in the door,” he said. “And when business conditions get difficult, the market tends to separate the good operators from the not-so-good operators.”

Pie Face has focused on significant international expansion. Last year the company received a massive boost after being featured on US chat show Late Show with David Letterman, while Homschek says plans are also in place to open in New Zealand and Britain. The business also received a $15 million investment from American casino billionaire Steven Wynn.

“On the whole, it’s been a challenging year. We’ve done fewer deals, and sales have taken longer,” Homschek said. “We’re starting to see recovery in some of the sales’ performances, and we’re starting to grow more. We’re definitely working a lot harder to get that same level of growth.”

Homschek reckons the tough retail conditions weaken the claims of the aggrieved franchisees. He wasn’t commenting specifically, but says “we don’t think there’s an issue”. “Generally speaking, the men and the boys get separated in a tough retail environment,” he said.

Two of the three franchisees have reportedly already sold their businesses back to the company, with another hoping to sell his shortly. They are all seeking damages for costs.

Disputes between franchisees and franchisors are common — the current review into the franchising code of conduct is an ongoing attempt to minimise those conflicts. But disgruntled franchisees have formed groups including the National Franchisee Coalition in an attempt to gain more power.

*This article was first published at SmartCompany