Significant changes to the Franchising Code of Conduct are set to take effect from April 1, 2025, following the Australian Government’s acceptance of key recommendations from the 2023 Independent Review conducted by Dr. Michael Schaper. This comprehensive review identified areas where the Code could better align with the principles of fairness and transparency to ensure a more balanced relationship between franchisors and franchisees. The upcoming amendments are designed to create clearer expectations and obligations for franchisors, with several key changes that aim to foster greater accountability, reduce disputes, and enhance disclosure practices.
For franchisors, these changes bring new compliance requirements, including enhanced financial disclosure obligations, clearer processes around dispute resolution, and the introduction of new penalties for non-compliance. It’s essential to be aware of these shifts to proactively adapt your franchise operations, avoid potential pitfalls, and maintain strong relationships with your franchisees.
Here’s a quick breakdown of the key changes and their implications on you as a franchisor:
1. Remaking the Code with a Clearer Purpose
The Franchising Code of Conduct will be remade with a more explicit and clearly articulated statement of purpose. This new statement aims to provide clear guidance on the Code’s objectives, reinforcing its role in establishing a fair and transparent framework for the franchisor-franchisee relationship. The purpose statement will outline the fundamental principles and expectations set by the Code, helping franchisors gain a more precise understanding of their legal obligations and responsibilities.
By articulating these objectives upfront, the revised Code seeks to eliminate ambiguities that previously existed, particularly around what the Code intends to regulate and what it does not. For franchisors, this greater clarity translates into a more defined scope of their duties and responsibilities, enabling them to align their practices with the Code’s core principles.
In practice, this change is expected to reduce instances of misinterpretation and misunderstanding between franchisors and franchisees, thereby decreasing the likelihood of disputes arising from differing expectations. A well-defined purpose will also aid franchisors in navigating complex compliance requirements more effectively, fostering better-informed decision-making and enhancing overall confidence in their business relationships.
2. Return on Investment Requirement
One of the most impactful changes to the Franchising Code is the introduction of a requirement that all franchise agreements must provide franchisees with a reasonable opportunity to achieve a return on their investment. This new mandate underscores the importance of fair financial practices within the franchising sector and aims to safeguard franchisees against unfair or unrealistic business models.
For franchisors, this change means that you must carefully evaluate and potentially restructure your franchise model to ensure that your franchisees are positioned for profitability. This includes reassessing key financial elements such as initial franchise fees, ongoing royalties, and marketing levies, as well as the operational costs associated with running a franchise. Providing franchisees with a reasonable chance to recoup their investment and earn a profit is no longer just a best practice; it is now a compliance obligation.
In practical terms, this requirement will likely make the process of franchise development more complex and, in some cases, more costly. Franchisors may need to prepare comprehensive financial projections to demonstrate the viability of the franchise model, based on realistic revenue forecasts and market conditions. These projections should be well-documented and transparent, giving prospective franchisees a clear understanding of the financial expectations and potential returns.
Moreover, you may also need to justify the fees charged to franchisees, explaining how these fees are calculated and how they contribute to the franchisee’s success. This greater emphasis on financial clarity and transparency is intended to foster a more balanced power dynamic and build trust between franchisors and franchisees. However, it also means that franchisors will need to invest more time and resources into developing and validating their financial frameworks to meet this new standard.
3. Compensation for Early Termination
The upcoming changes to the Franchising Code of Conduct will require all franchise agreements to include clear provisions for compensating franchisees in the event of an early termination. This means that if a franchisor terminates a franchise agreement before its agreed-upon term—outside of cases involving breaches by the franchisee—they must be prepared to compensate the affected franchisee. The intent behind this change is to promote fairness and protect franchisees from sudden or unjust terminations that could leave them in a financially vulnerable position.
For franchisors, this new requirement introduces additional financial and contractual considerations that must be accounted for within the franchise model. Specifically, you will need to carefully draft and incorporate compensation clauses into your agreements, ensuring they clearly outline the circumstances under which compensation will be paid, the methodology for calculating it, and any exceptions or limitations that may apply.
The inclusion of these compensation clauses will inevitably lead to increased costs associated with terminating franchise relationships early. Franchisors must be prepared to budget for potential compensation payouts, factoring them into financial planning and contingency reserves. This shift also requires a re-evaluation of franchise policies and practices to proactively minimise the likelihood of early terminations and ensure that decisions to end a franchise agreement are well-founded and documented.
In addition to financial planning, franchisors will need to take extra care when developing the framework for these compensation provisions. The provisions should be transparent and equitable to minimise disputes and mitigate the risk of legal challenges from disgruntled franchisees. Establishing a clear and fair approach to early termination and compensation will help foster stronger, more trusting relationships between franchisors and their franchisees, ultimately contributing to a more stable and predictable business environment.
4. Simplified Pre-Entry Disclosure
The changes to the Franchising Code will introduce a more streamlined approach to pre-entry disclosure by merging the key facts sheet with the main disclosure document. This simplified disclosure process is designed to reduce the administrative burden on franchisors while making it easier for prospective franchisees to digest essential information before entering into a franchise agreement. By consolidating these documents, the goal is to present franchisees with a clear and concise overview of the critical terms and conditions of the franchise arrangement, preventing them from becoming overwhelmed by excessive paperwork.
For franchisors, this new approach offers the benefit of a more efficient disclosure process, but it also comes with increased responsibility to ensure the consolidated documents are clear, accurate, and fully compliant with the updated Code. The streamlined disclosure must still provide all the necessary information required by law, including details about fees, financial performance, intellectual property, franchisee obligations, and dispute resolution procedures.
Franchisors will need to carefully review and update their disclosure documents to align with the new format. This review process should include a thorough check to verify that all essential details are covered in a way that is easily understandable to prospective franchisees. While the simplification aims to ease administrative tasks, it does not reduce the importance of thorough and transparent disclosure practices. In fact, it raises the bar for clarity and compliance, as missing or ambiguous information in the consolidated document could increase the risk of disputes or regulatory penalties.
In practice, this change may require franchisors to work closely with legal and compliance advisors to draft and refine their disclosure documents. The goal should be to ensure that the documents are not only legally sound but also presented in a way that builds trust with prospective franchisees. Clear and accurate pre-entry disclosures help set the right expectations from the outset, reducing the likelihood of misunderstandings and fostering a more positive franchise relationship.
5. Streamlined Obligations for Existing Franchisees
The upcoming changes to the Franchising Code of Conduct will introduce streamlined disclosure requirements for franchisors when renewing or extending agreements with existing franchisees. Under these changes, franchisors will no longer be required to provide the same comprehensive disclosure documents that are mandated for new franchisees, thereby reducing the administrative and compliance burden when retaining existing franchisees.
For franchisors, this streamlined approach offers significant benefits by simplifying the renewal process. Instead of going through extensive compliance procedures that can be both time-consuming and costly, franchisors will be able to focus on maintaining strong relationships with their franchisees and negotiating the terms of renewals or extensions more efficiently. This reduction in red tape is intended to create a smoother transition for franchisees who have already been operating under the franchise agreement and are familiar with the key terms and obligations.
However, it’s important for franchisors to remember that while the disclosure requirements are simplified, they are not entirely eliminated. You must still provide any material updates or changes to the franchise system that could impact existing franchisees, ensuring transparency and trust. This means that franchisors will need to carefully monitor and communicate significant changes to fees, policies, marketing arrangements, or operational guidelines that could affect a renewing franchisee’s business.
By easing the administrative workload, these streamlined obligations help reduce the compliance costs associated with franchise renewals and extensions. For franchisors, this translates into more time and resources that can be dedicated to supporting and growing the franchise network, rather than navigating unnecessary paperwork. Additionally, this simplified process will likely contribute to an improved experience for franchisees, making them more inclined to continue their association with the franchise, ultimately benefiting the overall stability and growth of the franchise system.
6. Public Naming of Non-Compliant Franchisors
One of the significant new measures introduced under the revised Franchising Code of Conduct is the public naming of franchisors who fail to meaningfully engage in dispute resolution processes. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) will have the authority to publicly identify franchisors who do not participate in dispute resolution efforts in good faith or who demonstrate a pattern of non-compliance with dispute resolution requirements. This change is designed to enhance accountability and encourage franchisors to take their dispute resolution obligations seriously.
For franchisors, the potential of being publicly named poses a considerable reputational risk. A failure to engage constructively in resolving disputes could lead to negative publicity, damaging both your brand and your relationships with existing and prospective franchisees. This public exposure serves as a powerful deterrent, motivating franchisors to prioritise the fair and timely resolution of conflicts.
Engaging meaningfully in dispute resolution involves actively participating in mediation sessions, being transparent and open in discussions, and showing a genuine commitment to finding mutually agreeable solutions. Franchisors must be prepared to allocate the necessary resources and time to resolve disputes effectively, recognising that unresolved issues can escalate and lead to more severe consequences for their franchise network.
The introduction of this measure underscores the importance of adopting proactive strategies for conflict prevention and resolution within your franchise model. Establishing clear internal policies, training your team on conflict resolution best practices, and promoting open lines of communication with franchisees can help minimise the risk of disputes escalating to the point of public intervention by the ASBFEO.
By embracing a culture of good faith and transparency, franchisors can avoid the negative repercussions of being publicly named and instead foster stronger, more trusting relationships with their franchisees, enhancing the long-term stability and reputation of the franchise system.
7. Increased Penalties for Code Breaches
The revised Franchising Code of Conduct will introduce tougher penalties for non-compliance, significantly expanding the range of breaches that attract penalties and increasing the fines associated with those breaches. This change reflects a shift towards stricter enforcement and aims to hold franchisors more accountable for their actions. By raising the financial stakes, the revised Code is intended to encourage higher levels of compliance and deter behaviours that could harm franchisees or undermine the integrity of the franchise system.
For franchisors, these increased penalties mean that non-compliance is not just a legal risk but a potentially substantial financial one as well. Breaches could result in hefty fines that impact your bottom line, as well as other sanctions that could affect your ability to operate or expand your franchise network. Additionally, beyond the direct financial impact, repeated or serious breaches could lead to reputational damage, eroding the trust of existing and prospective franchisees and damaging your brand’s credibility.
To mitigate these risks, franchisors must adopt a proactive approach to compliance. This includes regularly reviewing and updating franchise agreements, policies, and disclosure documents to align with the latest Code requirements. Establishing internal compliance frameworks and training staff on their obligations can help identify and address potential issues before they escalate into breaches. Furthermore, franchisors should maintain thorough records of all compliance efforts and interactions with franchisees to demonstrate good faith and accountability in case of any regulatory scrutiny.
By prioritising full compliance with the updated Code, franchisors not only avoid the financial and reputational repercussions of increased penalties but also foster a more ethical and transparent franchise environment. This proactive stance strengthens your business relationships and contributes to the long-term sustainability and growth of your franchise system.
8. Potential Licensing Regime
As part of the changes to the Franchising Code of Conduct, the government will explore the introduction of a licensing regime for the franchising sector. A Treasury taskforce has been commissioned to conduct a comprehensive cost-benefit analysis of such a system. The potential licensing regime aims to enhance regulatory oversight and enforce higher standards of conduct within the franchising industry. While the final decision on its implementation is yet to be made, the prospect of a licensing regime has significant implications for franchisors.
If introduced, a licensing system would likely require franchisors to meet certain qualifications, adhere to stricter compliance standards, and potentially renew their licenses periodically. This additional layer of regulation could raise the barriers to entry for new franchisors and increase the ongoing costs of running a franchise. Compliance with licensing requirements may also involve demonstrating financial stability, providing evidence of sound business practices, and adhering to stricter reporting obligations.
For franchisors, the potential licensing regime could lead to increased complexity and higher compliance costs. You would need to allocate more resources to ensure adherence to licensing standards and may be subject to periodic audits or assessments by regulatory authorities. This could be particularly challenging for smaller franchisors or those in the early stages of their business, potentially limiting growth and expansion opportunities.
On the positive side, a licensing system could contribute to raising standards within the franchising sector by ensuring that all franchisors meet a baseline level of competence and integrity. For reputable franchisors, this could help level the playing field, weeding out unethical or poorly managed franchise systems that tarnish the sector’s reputation. By raising the bar, a licensing regime could ultimately promote greater trust and transparency, benefiting both franchisors and franchisees in the long run.
However, with the potential for added regulatory hurdles, it is essential for franchisors to closely monitor developments and participate in consultations or feedback opportunities with the government. By staying informed and proactively preparing for the possible introduction of a licensing regime, franchisors can better anticipate and adapt to changes in the regulatory landscape, ensuring that their business remains compliant and competitive.
Conclusion: Stricter Requirements but Clearer Guidelines
The 2025 changes to the Franchising Code of Conduct reflect a decisive shift towards creating a more equitable and transparent franchising environment in Australia. While these changes introduce additional compliance obligations, they also provide clearer guidelines for franchisors, helping to establish a fairer system for all parties involved. Stricter regulations around key areas such as early termination, return on investment, and dispute resolution underscore the need for franchisors to carefully review and update their franchise agreements, disclosure documents, and operational procedures to align with the new requirements.
Although certain amendments, such as the streamlined pre-entry disclosure and obligations for existing franchisees, aim to ease administrative burdens, the introduction of more rigorous compliance standards means that preparation is crucial. Franchisors must not only understand the changes but proactively adapt their business practices to mitigate risks and avoid future penalties. Compliance will be key to maintaining strong, legally sound franchise systems under the revised Code.
As proud members of the Franchise Council of Australia, we are well-versed in the intricacies of the new Code and are committed to helping franchisors navigate these changes. Whether you need assistance with reviewing and updating your franchise agreements, refining your compliance processes, or understanding the implications of these reforms, we are here to support you every step of the way. Our goal is to ensure that you are fully prepared to meet the new requirements with confidence and continue building a successful and compliant franchise network.
Remember, while this information provides a general overview, legal advice tailored to your specific circumstances is invaluable. Don’t hesitate to contact Rise Legal for personalised guidance or book in a free Discovery Call.
Disclaimer: This blog post is intended for informational purposes only and should not be considered legal advice. Consult with a qualified commercial lawyer for personalised advice related to your specific circumstances.
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