Whether you’re looking for a place to visit on your next coffee break or are searching for the most successful business ideas, everyone has their own pick for the best coffee franchise in their area. Unfortunately, the two don’t always mix: while the coffee industry is a fast-growing field, not every coffee shop franchise will provide enough support and franchise training to allow you to thrive. Moreover, a questionable franchise can lead to financial problems, business difficulties, and even legal action. Entrepreneurs in Denver, CO recently learned this lesson the hard way, after one lawsuit against their franchise system turned into two.
In February 2014, three franchisees sued the Denver-based coffee company Dazbog Coffee Co., accusing the organization of engaging in systematic and fraudulent charging, which prevented profitable business. A second civil complaint also accused the company of racketeering and civil theft. Leonid Yuffa, the co-founder of the 19-year old business, called the lawsuit “factually and legally deficient”, and the court partially agreed: when an arbitrator heard the case of one of the franchisees, JavaGen LLC, in August, the judge ruled that there was no basis in many of the claims. This included the group’s accusations of fraud, civil theft and violations of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. However, the judge did find that Dazbog had charged unreasonable prices for goods it sold to its franchisees, significantly contributing to the failures of these businesses.
A review of the case certainly casts doubt on Dazbog: the judge noted that the company raised prices on cold cups and tea filters 68 and 41% respectively, making it more difficult for franchisees to afford basic supplies and leaving them without a path that would allow them to remain profitable. As a result, the court declared the franchise agreement null and void while still allowing JavaGen to remain in possession of its premises. Dazbog will also be required to repurchase all of its branded property from the location. However, damages were not awarded to either party and Dazbog settled with the other franchisees out of court.
Now, another franchisee, Padbros Enterprises LLC, has filed a lawsuit claiming that it has suffered from the same questionable practices the other locations did: Padbros, which operates two Dazbog stores in Denver, alleges that the company has no pricing formulas in place to guarantee fair costs, significantly marked up the products it sold to franchisees, and did not change its tactics even when numerous franchisees failed. Dazbog is moving forward with the suit, but Yuffa told the Denver Business Journal that he expects franchising to continue to expand in coming years.
The Dazbog case highlights the importance of choosing the best coffee franchise system to invest in; as these recent lawsuits show, a bad choice could lead to high operation costs, a lack of support, a failing business and even a lawsuit. These challenges work against the potential benefits of franchising and the coffee industry as a whole: the best coffee franchises will provide a significant amount of support, training and resources to help you succeed in your endeavor. Don’t take the risk that your investment will sour: investigate your franchising options carefully.