Changes to the Franchising Code of Conduct: Key Amendments Franchisors Need to be Aware Of

The Competition and Consumer (Industry Codes –Franchising) Regulations 2024 (New Code) introduces significant changes that will take effect from 1 November 2025. You can view a copy of the New Code here.

The key changes have been summarised below.
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1. Compensation for Early Termination – Section 43

Franchise agreements must now include compensation for franchisees if the franchisor ends the agreement early because it:

·      withdraws from the Australian market;

·      rationalises its networks in Australia; or

·      changes its distribution models in Australia.

Franchisors should include a clear process for claiming compensation, which must consider:

·      lost profit from direct and indirect revenue;

·      unamortised capital expenditure requested by the franchisor;

·      loss of opportunity in selling established goodwill; and

·      costs of winding up the franchised business.

When terminating for these reasons, franchisors must allow the franchisee to return, and either accept, buy back or compensate for:

·      all outstanding franchisor-specified stock required to operate the business; and

·      all essential or branded equipment that was required under the franchise agreement or operations manual that cannot be reasonably repurposed for a similar business.
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2. Reasonable Opportunity to Make a Return on Investment – Section 44

Franchisors must provide franchisees with a reasonable opportunity to make a return on any required investment during the term of the agreement.

This is not a guarantee of profit but ensures the franchise terms align with the scale of the required  investment. Franchisors must structure agreements fairly, ensuring franchisees have sufficient time to earn a easonable return by ensuring the term of the agreement is adequate.

Franchise buyers should still assess investment viability independently. However, franchisors are expected to demonstrate that the agreement term is commercially fair and consistent with the required capital outlay.

During initial negotiations, franchisors must exercise caution to avoid making statements that could be construed as assurances of profitability.

To mitigate the risk of misrepresentation, franchisors should:

·      refrain from making representations about profitability, including unsupported financial forecasts or performance estimates;

·      clearly state that any financial information provided is indicative only and subject to the franchisee’s own due diligence;

·      ensure that earnings information considers reasonable risks and foreseeable expenses;

·      avoid market saturation and excessive restrictions on operations that prevent cost management or create unsustainable profit margins;

·      analyse the costs and terms of each franchise agreement to commercially assess whether a reasonable business opportunity exists before entering into, renewing, extending or transferring any franchise agreements.
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3. Specific Purpose Funds – Sections 31 and 61 and Item 15 of Schedule 1

The New Code expands the rules for marketing and cooperative funds to include all specific purpose funds, such as technology,training, sustainability and group projects.

Franchisors must comply with sections 31 and 61 of the New Code, including:

·      establishing a separate account for all franchisee specific contributions;

·      transferring existing fund balances into that account;

·      contributing to each fund on the same basis as franchisees for all corporate-owned outlets; and

·      maintaining records to facilitate the preparation of financial statements.

If contributing to a fund, franchisors must disclose:

·      the purpose of the fund;

·      who contributes to the fund;

·      how much the franchisee must contribute to the fund and if some franchisees contribute more or less;

·      who controls or administers the fund;

·      the types of expenses the fund covers;

·      how financial statements will be prepared,audited and reported;

·      whether the franchisor, or an associate,supplies the goods or services that the fund pays for; and

·      whether the fund benefits the franchisee’sbusiness directly.

Franchise agreements should make it clear that one-off‘ fees for service’ are not specific purpose funds. For example, if a franchisee is required to pay a one-off amount to the franchisor in exchange for training, and this money is not pooled or operated as a fund, this is unlikely to be considered a specific purpose fund.
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4. Disclosure of Significant Capital Expenditure – Sections20(4) and 47 and Item 14(1A) and 14(1B) of Schedule 1

Franchisors must now disclose any significant capital expenditure required by the franchisee during the agreement term, including:

·      the rationale for the expenditure;

·      the amount, timing and nature of the expenditure;

·      the anticipated outcomes and benefits; and

·      any expected risks.

A franchisor cannot sign an agreement until they have discussed such expenditure with the franchisee, including how and when it maybe recouped.

Expenditure is likely to be significant if it:

·      is large relative to the franchisee’s investment, profits or turnover;

·      could affect the franchisee’s solvency or profitability; or

·      goes beyond normal repairs, maintenance, end of usable life replacement or normal inventory requirements.

Significant capital expenditure may arise in the following scenarios:

·      renovation works required to maintain current brand standards;

·      initial fit-out or redesign costs associated with the relocation or modernisation of a premises;

·      upgrades to technology systems, such as POS systems, specialised equipment, digital ordering platforms or compliance software;

·      rebranding initiatives and associated costs, including marketing materials, signage, uniforms and online assets;

·      franchisor-mandated equipment or hardware replacement, excluding those that arise from normal wear and tear; and

·      marketing or operational initiatives requiring franchisee contribution.

Franchisors must ensure that any foreseeable and significant expenditure is clearly disclosed and discussed with prospective franchisees before the execution of the franchise agreement.
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Checklist: Actions to Complete by 1 November 2025

·      Update all franchise agreements to reflect new compensation and termination requirements

·      Review fund structures and establish compliant separate accounts

·      Amend disclosure documents to include new specific purpose fund and expenditure details

·      Review agreement terms to confirm they provide a fair opportunity for return on investment
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Key Takeaways

The New Code strengthens franchisee protections and ensures fairness in investment and termination arrangements. Franchisors must take proactive steps before 1 November 2025 to ensure compliance.

For advice or legal support, contact Edward Hart.