As you would be aware, the Franchise Code of Conduct (‘Code’) has been amended, again, and by the time you are reading this article the new Code is now in force.
I will try and summarise the changes, very crudely, in 5 points:
- No more Key Facts Sheet. Repetitive and not helpful.
- Fines, fines, fines! Numerous Code provisions now have fines for noncompliance.
- More auditing and more admin! Fees paid for a specific purpose (i.e.. technology fees etc) are now treated like a Marketing Fund.
- More disclosure and Franchise Agreement amendments. …nothing life changing, but re-drafting required.
- Guaranteed ROI for franchised businesses AND compensation for early termination. …hold on, what?
I concede, the ‘guaranteed ROI’ headline is bit click-baity but that is what we are going to do a deep dive into.
A bit of background, Dr Michael Schaper in 2024 was tasked to carry out a review of the Australian franchise industry (‘Schaper Review’). Dr Schaper said the disclosure document did not need more information, however notwithstanding this, we ended up getting more information in the Disclosure Document. I will briefly touch on one of those new items, but we are staying focussed on the new ROI provision here.
The Queensland Law Society (QLS) stated, “the process [for franchise recruitment] has now become too complicated and the documentation too extensive. The extent of documentation that a franchisee has to review can be overwhelming”.
Dr Schaper clarified his recommendation is not that the disclosure document be shortened or removed, however the Report clearly states in its findings “any further attempt to address concerns by mandating greater disclosure is likely to be counterproductive”. Where he recommended additional helpful information be included, it was in the Franchise Disclosure Register (FDR) (which to date has been a flop / un-utilised tool).
Before we dive into the ROI change, let’s take a quick look at one example of a new addition to the Disclosure Document. This item applies to Disclosure Documents issued from 1 April 2025. Evidently, this amendment is so important that it could not even wait until franchisors update their disclosure document at EOFY. This new item in the Code, is the following question: “will Franchisees face competition from businesses not associated with the franchisor.”
The answer to this Item (dare I say by 100% of franchisors) will simply be ‘Yes, derrrr’. Is that seriously a question that needed to increase the size of the disclosure document? Even more frustrating, is that the Government considered this question so urgently needed to be answered that franchisors had to amend their disclosure document in April before the EOFY update to include this question. I am convinced it was an error by the public servants in Canberra to put franchisors in the position of needing to make amendments to their disclosure document and franchise agreement in April and then a few months later update their documents for EOFY and make further amendments to the disclosure document and franchise agreement.
Let’s stay focussed here, ROI.
New ROI Section
From 1 November 2025 the Code has been amended to state franchisees, across all industries, must have a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the Franchisor as part of entering into the agreement.
Dr Schaper’s findings were that “no major concerns were raised about the current provisions of the Code which directly regulated the terms of franchise agreements.” So that makes me wonder, if it wasn’t broke why did we fix it?
The Australian Association of Franchisees (AAF) argued the ROI section (and the section requiring compensation for early termination if a franchisor leaves Australia or bails on franchising which we will not go into) should apply to the entire franchising sector. Dr Schaper obviously agreed including in his report the following statement, “franchising is a form of capital raising by franchisors, and franchisees should be treated like shareholders or other types of investors.”
The argument is that these sections were introduced to the Automobile Franchise industry without any hiccup. The concern however is that car dealers are a different beast, and by introducing it, without clarification, to all sectors will it open the floodgates of litigation against franchisors when franchisees are not making a return on investment, regardless of the circumstances.
How does the new ROI clause impact Franchisors?
The Explanatory Statement issued by authority of the Minister for Small Business, states:
What is considered a reasonable opportunity would be specific to the terms of each franchise agreement, the costs paid by the franchisee and the length of the agreement. Franchisors are not expected to provide a contractual guarantee of profit or the success of the franchisee’s business. It is not intended to remove the risks of running a business, but it is intended to ensure that the term of the Franchise Agreement is consistent with the level of investment required.
The above is not all that helpful, so the $198,000.00 question (which is the fine for noncompliance) is what’s a ‘reasonable opportunity to make a return on investment’?
The Code does not define ‘reasonable opportunity’ or ‘return’ so we are left to speculate as to whether reasonable opportunity simply means granting a franchisee a reasonable length term, and further speculate as to what a reasonable term is. Is 5 + 5 a reasonable term? Fortunately, the Explanatory Statement clarifies that the new provision of the Code does “not require franchisors to guarantee a profit or success of the franchisee’s business”. But that’s odd… So, if ‘return on investment’ does not mean the franchised business needs to be successful or profitable, what exactly is a franchisor required to do here?
It’s problematic. So that got me thinking, did the Government listen to recommendations from the broader franchising sector, representing voices of franchisors, and business owners, prior to making these 2025 Code changes?
Was the Franchise Industry heard?
Many submissions were made to the Government on the issue, and I must give credit to the Franchise Council of Australia (FCA) and, full disclosure, our firm has been a member of the FCA for almost 2 decades, however I was curious to read their submissions (and submissions of others). The FCA recommended the proposed ROI section should be “deferred until a later amendment pack, to allow for the comprehensive consultation with the franchise community” and “if this cant be done, it should be amended [not simply cut and paste from the car dealership section of the Code] to avoid creating regulatory uncertainty”.
The proposed sections were criticised by associations representing both franchisors and franchisees. Both the FCA and the Business Council of Australia (BCA), made submissions that the section should not be the same as it is in the car dealers’ part of the Code, and rather a specific definition of ‘return’ would be helpful to allow franchisors to gauge what kind of return would be reasonable. The AAF, on the other hand, submitted that the term ‘reasonable opportunity’ was simply too vague.
The above-mentioned associations all sought clarity regarding whether the term of a franchise agreement could be a potential yardstick to assist franchisors with measuring what a reasonable opportunity is. The BCA suggested that tenure be included as a factor when considering whether a reasonable opportunity was provided. The FCA asked for specific indicators based on franchisees’ investment and term. The AAF wanted the provision to require minimum term lengths in franchise agreements relative to the amount a franchisee invests.
The FCA’s suggested modification, verbatim, was to “link the issue specifically to tenure and include a specific condition that a franchise Agreement with a duration of 5 years of more would satisfy [the] requirement.”
The submissions were obviously ignored by the Government, and the ROI clause is now firmly a part of the new Code – and it’s a copy and paste job from the new vehicle dealership agreements (NVDAs) section of the old franchising code of conduct; Broad and ambiguous – a litigation lawyers dream.
It makes sense for Car Dealerships but not for the whole Franchising sector
So the sentiment is, “hey guys, the Motor Vehicle dealerships have had these sections and they aren’t complaining, so the rest of you will be fine”.
The FCA, rightly, submitted, “the automotive industry is very different to the broader franchise sector – all [motor vehicle] franchisors are major foreign corporations, the duration of the agreements are substantially shorter than a typical franchise agreement and there are often substantial capital investment requirements imposed on dealers”.
Both the FCA and Craveable Brands submitted to the Government, NVDAs are entirely different beasts from general franchise agreements. Most NVDAs are for far shorter terms, sometimes lasting for as little as one year. Franchisees often must invest a significant amount of capital upfront and do not have a lot of time to recover that investment. The requirement for franchisors to ensure a franchisee has a reasonable opportunity to make a return on their investment for car dealerships is logical.
The FCA’s comments were
“Clauses 46A and 46B [the sections dealing with ROI and compensation for early termination] were introduced as an urgent Government response to concerns expressed by Australian dealers following the announcement by General Motors of the retirement of the Holden brand and closure of the Holder dealer network. Honda announced future network rationalisation and (with Mercedes) moved to an agency model.”
In contrast, outside of car dealerships, franchise agreements are usually for long terms – anywhere from seven to ten years plus. Non NVDA franchise agreements also do not require the same high initial investment at the outset as is ordinarily required to operate a New Vehicle Dealership.
What’s the risk: Are all franchised businesses now guaranteed ROI purchases?
My concern is that this Code change, will provide franchisees looking to avoid their contractual obligations under their franchise agreement with the argument: ‘the terms of the franchise agreement are such that the franchisee had no reasonable opportunity to make a return on the investment’. How is a franchisor expected to refute such allegations and what evidence is a franchisor required to provide to prove a franchisee did have a reasonable opportunity to make a reasonable return on investment? The amended Code provides no help here.
I disagree with the submissions in the Schaper Report that franchisees are akin to shareholders of the franchisor and need to be treated as such. Franchisees are independent business owners utilising the intellectual property developed by the franchisor; there is a benefit for the franchisee to utilise that IP as it comes with brand recognition by consumers, and expectation that the services or goods offered under a brand will be of a certain quality, standard or experience. This allows a franchisee to operate a business without needing to start from the ground up on their own. It is a mutually beneficial and collaborative relationship between business owners, each running their own independent businesses (albeit using the same brand); a franchisee is not a shareholder, they are a business owner and this comes with a certain degree of accountability that should not be shelved on to franchisors.
Whilst the Explanatory Notes of the Code state the new ROI section is “not intended to remove the inherent risks of running a business” in my opinion, that is precisely what it is at risk of doing.
Now, at this juncture you might think, ‘Sam, why are you so concerned about this section that ensures franchisees make an ROI? Is it not reasonable that franchisees should always make an ROI?
Here is my point – of course franchisees should be making an ROI. I would go so far to say that our firm would not be prepared to act for a franchisor who purported to sell a franchised business with no reasonable possibility of a franchisee having the opportunity to make an ROI. My concern is that this section, with so much uncertainty in its drafting, brings a high risk of litigation into an industry where franchisors already face so much pressure to ensure their franchisees are succeeding – particularly those franchisees who may lack some of the requisite business acumen to operate a business on their own (and potentially should have stayed an employee rather than owning a business).
The problem is that whilst other businesses owners, when times are tough, only have themselves to blame, here, if a franchised business fails, we can blame the franchisor.
Poor performing franchisees (that is, franchisees without the necessary business acumen, motivation or desire to follow an operations manual) now have a section of the franchising code of conduct that they can point to, when they want out or their money back, and say “this franchise agreement did not give me a reasonable opportunity to make a return on my investment”.
So where to from here?
Two things for franchisors:
- You need to carefully consider the length of the terms of your franchise agreements and consider whether franchisees have a reasonable opportunity to make an ROI. I honestly believe, in most cases, this will not be an issue for franchisors; and
- Franchisors will want to proceed with caution when recruiting franchisees, to avoid getting caught in the crosshairs of this new provision. Ensure franchisee selection includes thorough due diligence on the candidate to ensure they are capable of operating a business.
Ultimately, it is now more important than ever to tighten up franchisee selection criteria. As mentioned above, franchisors are not required to guarantee that franchisees make a profit from the franchised business or guarantee the success of the franchisee’s business, but the new clause is open to interpretation, which means disgruntled franchisees’ solicitors will certainly be relying on it.
If you are a franchisor and have any queries about the changes to the franchising code of conduct or require your franchise agreement and disclosure document be reviewed to ensure you are code compliant please do not hesitate to reach out to IP Partnership Lawyers. If you are a franchisee and believe your franchise agreement does not provide you with a reasonable opportunity to make a return on your investment into a franchised business (and you are reading this after November 2025) please also reach out to one of our experienced franchised lawyers at IP Partnership.
Sam Rees is the Managing Director of IP Partnership Lawyers, a law firm specialising in franchise law and commercial law. IP Partnership Lawyers have been the experts in franchising since 1995 and represent Franchisors and Franchisees from all over Australia and New Zealand.