Key provisions of the Franchising Code of Conduct (“Code”) that commence on 1 November 2025
The key new obligations under the Franchising Code of Conduct that apply from 1 November 2025, include:
- Mandatory compensation provisions for early termination in certain circumstances.
- A requirement that franchise agreements offer a reasonable opportunity to make a return on investment.
- Mandatory disclosure and discussion around significant capital expenditure for franchisees.
- Extended obligations regarding specific purpose funds, including governance and reporting requirements.
These changes strengthen protections for franchisees, require greater transparency from franchisors, and increase the compliance burden (and risk) for franchisors. For new and renewing franchise agreements from that date, careful legal and commercial planning will be essential.
Further to our previous article on the Franchising Code of Conduct (Code) starting on 1 April 2025, which you can access here, we have listed below the Key Provisions Coming into effect on and from 1 November 2025, as part of the second under the Code.
Please note: these provisions only apply to franchise agreements entered into, renewed, extended or transferred on or after that date.
- Compensation for Early Termination – section 43 requires applicable franchise agreements to include contractual provisions to compensate franchisees when Franchisors terminate a franchise agreement before the end of the term.
What does this mean?
- If the applicable franchise agreement allows the franchisor to terminate early without the franchisee being in breach, say if the franchisor withdraws from the Australian market or changes its distribution model or rationalises its network in Australia, the agreement must provide for reasonable compensation to the franchisee
- Such compensation must consider factors such as lost profits (direct or indirect), unamortised capital expenditure requested by the franchisor, loss of goodwill, and the cost of winding up the franchised business.
- The agreement must also require the franchisor to acquire from the franchisee stock and branded equipment and products that the franchisee may not resell thereafter (eg, branded products or fitout)
Practical tips – Franchisors will need to review and (if necessary) revise their standard franchise agreement templates to include a compensation clause, determine how the calculation will be made, and ensure it is transparent to prospective franchisees.
Franchisees entering into agreements should look closely at the early termination clause, ask how compensation is calculated, and seek legal advice.
- “Reasonable Opportunity to Make a Return on Investment” Obligation – Franchisors must not enter into a franchise agreement with a franchisee unless the agreement offers a franchisee a “reasonable opportunity” to make a return on their investment during the term of the agreement.
What does this mean?
- This obligation was previously limited to new vehicle dealership agreements; the Code now extends this to all franchising arrangements.
- The franchisor is not required to guarantee a profit, but must ensure that the franchisee has a genuine chance to earn a return. Therefore, earnings forecasts or historical results should be realistic, take account of risks, and be supported by reasonable assumptions.
- The disclosure document must provide sufficient information regarding the investment, anticipated returns, and material risks to enable a prospective franchisee to make an informed decision whether a reasonable return is attainable.
Practical Tips – Franchisors must evaluate their business model, ensure the investment proposition is viable, and disclose relevant data about returns, risks and assumptions. The tenure of the franchise agreement must be consistent with such assumptions. Franchisees should rigorously assess the business model, ask for supporting evidence and undertake due diligence on the likely return on investment, and obtain business and accounting advice.
- Disclosure of Significant Capital Expenditure – Franchisors must disclose any significant capital expenditure that a franchisee may be required to incur, and to discuss that expenditure with prospective franchisees.
What does this means?
- “Significant capital expenditure” refers to major investments imposed by the franchisor (or reasonably foreseeable) during the term of the franchise, e.g., major refits, equipment upgrades, store redesigns.
- The disclosure document must include the nature and purpose of the significant capital expenditure, an estimate of the cost, expected timing, method used to determine such costs, anticipated benefits or outcomes, and risks.
- The franchisor must ensure there has been a discussion with the prospective franchisee about this expenditure before the agreement is entered into.
Practical Tips – Franchisors need to evaluate what capital spending obligations may apply (now or in the future), quantify those obligations, and build that into their disclosure documents and discussions, ensuring they maintain accurate records of all such discussions.
Prospective franchisees should ask about capital expenditure obligations, timing, cost estimation, how often upgrades may be required, and how that impacts their investment return. They should then keep accurate records of such discussions with the franchisor or the franchisor’s representatives, and discuss the impact of such expenditures with their accountants/business advisers.
- Specific Purpose Funds – Extended Obligations around “specific purpose funds” (which include marketing funds, cooperative funds, and other funds to which franchisees must contribute for a common purpose).
What does this means?
- The term “specific purpose funds” is broader than just marketing or cooperative funds and includes any fund required by the franchisor for a specific and common purpose.
- For such funds (other than purely marketing/cooperative funds), from 1 November 2025 the franchisor (or fund administrator) must comply with reporting and governance obligations. These include: preparing financial statements for the fund, having audits or reviews, providing franchisees access to information about fund management and expenditure, and ensuring transparency and accountability.
- The disclosure document must include details of any specific purpose funds: purpose, contribution obligations, how funds are governed, what the money will be used for, how decisions are made by franchisor/fund administrator.
Practical Tips -Franchisors must identify all funds to which franchisees contribute: marketing, cooperative, or other funds for a specified common purpose, and ensure appropriate governance structures and disclosures are in place before 1 November 2025. Mick Keogh, the Deputy Chair of the Australian Competition & Consumer Commission (ACCC) which is the watchdog in respect of Code compliance, has confirmed during the National Franchise Convention in Melbourne on 19 October 2025, that all funds in current marketing Funds should be transferred to new accounts for Special Purpose Funds to ensure compliance with these obligations.
Franchisees should review disclosure documents carefully to see which specific purpose funds apply, the contribution required, the governance of those funds, and understand how the funds’ expenditures will be audited or reported.
Transition and Scope
- In addition to the above comments, existing franchise agreements (entered into before 1 April 2025) are generally governed by the previous Code unless they are renewed, transferred or extended after 1 April 2025.
- Franchisors may in many cases choose to apply the new provisions earlier than 1 November 2025 (i.e., “opt in”), but are required to ensure full compliance by that date for relevant agreements.
Please reach out to our corporate and commercial team in relation to the above provisions, if you have any questions either as a franchisor or a prospective franchisee.
MV Law Canberra
Ph: (02) 6279 4444
Email: info@mvlaw.com.au