Franchisors must provide franchisees a reasonable opportunity to make a ROI

Recent reforms to the Franchising Code of Conduct introduced a new obligation requiring franchisors to give franchisees a reasonable opportunity to make a return on their investment (ROI).  This change reflects concern that some franchise arrangements required franchisees to make substantial upfront investments without a realistic opportunity to make a return on this investment.

These reforms arise under the Competition and Consumer (Industry Codes-Franchising) Regulation 2024 (Cth) (New Code), which commenced on 1 April 2025.  The Code previously contained in the Competition and Consumer (Industry Codes-Franchising) Regulation 2014 (Cth) (Old Code) continues to apply to franchise agreements entered before 1 April 2025, until those agreements are renewed, extended or transferred.

The requirement to provide franchisees with a reasonable opportunity to make a ROI applies to franchise agreements entered into, renewed or extended on or after 1 November 2025.

The new obligation relating to ROI

Under the New Code, franchise agreements must provide franchisees with a reasonable opportunity to make a ROI during the term of the agreement.

In a franchising arrangement, the franchisor grants a franchisee the right to operate a business using the franchisor’s brand, systems and intellectual property in exchange for fees and ongoing compliance with the franchise system.

Return on investment refers to the franchisee’s ability to recover the capital they are required to invest in establishing and operating the franchised business and to generate ongoing profit from that business.  This may include obtaining a return on:

• the initial franchise fee;
• premises fit-out costs;
• lease costs;
• equipment purchases or leases;
• other investments required by the franchisor.

Importantly, the requirement does not guarantee profitability.  Franchising remains a commercial venture involving business risk.

Rather, the obligation focuses on whether the structure and commercial terms of the franchise agreement provide a franchisee with a realistic opportunity to recover their investment and operate a viable business during the term of the agreement.

What counts as a reasonable opportunity

Of course as at the date of this article there are no published decisions of Courts on this issues.   The New Code does not prescribe a strict formula for determining whether a franchisee has or had a reasonable opportunity to achieve a return on investment.  Instead, the assessment depends on the circumstances of each franchise arrangement.

Relevant considerations may include:

• the duration and terms of the franchise agreement;
• the underlying business model;
• the amount of the investment required;
• the business type and location;
• fees, operating costs and margins;
• economic conditions, regulation and competition;
• the skills and resources of the franchisee; and
• the level of support provided by the franchisor.

A reasonable opportunity therefore depends on whether the franchise arrangement allows a typical franchisee operating under the system to recoup required capital expenditure and operate profitably over time.

What franchisors should do to provide a “reasonable opportunity”

Franchisors should consider their franchise agreements and business models to ensure that franchisees are given a genuine opportunity to recover their investment.

Practical steps may include:

• ensuring the term of the franchise agreement is long enough to allow franchisees to recover capital investment;
• assessing whether the initial and ongoing investment requirements are proportionate to the expected commercial returns;
• providing realistic and evidence-based financial information to prospective franchisees;
• avoiding fee structures that leave franchisees with unreasonably tight margins;
• ensuring the franchise system itself is commercially viable;;
• avoiding market saturation or excessive competition within the franchise network; and
• implementing appropriate franchisee selection and training processes.

Significance for franchisors

The new requirement represents an important shift in the regulation of franchising in Australia in favour of franchisees

Historically, the Code focused primarily on disclosure obligations and procedural fairness.  The New Code goes further by requiring franchisors to consider whether their franchise structures provide franchisees with a genuine commercial opportunity to recover their investment.

Failure to comply with the Code may expose franchisors to significant civil penalties, with non-compliance potentially attracting penalties of up to 600 penalty units.

Key takeaways

The New Codeintroduces a new obligation requiring franchisors to ensure franchisees have a reasonable opportunity to make a return on their investment.

A reasonable opportunity to achieve a return on investment does not guarantee profitability, but franchise arrangements must allow franchisees a realistic chance to recover required capital investment.

Whether the requirement is satisfied will depend on factors such as the term of the agreement, the capital investment required, the commercial terms of the arrangement and the support provided by the franchisor.

Franchisors should review their franchise agreements, disclosure documents to ensure that they comply with the New Code.

Legislation

Competition And Consumer (Industry Codes-Franchising) Regulations 2024

Competition And Consumer (Industry Codes-Franchising) Regulation 2014 

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Further information

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Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances

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