Franchising Code Updates effective April 1, 2025

Key Takeaways

• The Franchising Code of Conduct (Code) has undergone significant reform following its Independent Review by Dr Michael Schaper in 2024. These changes come into effect 1 April 2025 and will generally impact disclosure document requirements from 1 November 2025.
• The Code updates have increased franchisor obligations in disclosing the significant capital expenditure expected of a prospective franchisee, and the reasonable likelihood of making a return on all required investment. This change is intended to promote fair business opportunities for franchisees.
• From 1 November 2025, franchisors will be required to disclose and audit all specific purpose funds in the franchise system, and disclose all significant capital expenditure to prospective franchisees.
• Franchisors will be required to provide compensation to franchisees, and buy back or compensate for certain stock and equipment, in circumstances where the franchise agreement is terminated because the franchisor has withdrawn or reorganises its company in the Australian market.

The Competition and Consumer (Industry Codes—Franchising) Regulations 2024 (Cth) (New Code) will commence 1 April 2025, making significant changes to the existing Franchising Code of Conduct. The changes follow an independent review of the effectiveness of the Code ahead of its sunset on 1 April.  These changes will impact both franchisors and franchisees alike and will aim to provide more transparency, enforce stricter compliance with the new regulations and improve fairness. The changes under the New Code will affect agreements entered into, renewed, extended or transferred from 1 April 2025 onwards.

To assist franchisors with the transition to the New Code, we have condensed some of the main changes and relevant actions franchisors need to take below:

1. Streamlined Disclosure Process
   • The key facts sheet will be discontinued and integrated into the disclosure document.
   • Action: Review and update disclosure documents to incorporate the information previously in the key facts sheet.
2. Strengthened Termination and Compensation Rules
   • Franchisors must compensate franchisees for early termination due to the franchisor withdrawing or reorganising its Australian company. The franchise agreement must specify how the compensation is to be calculated, and must require the franchisor to buy back stock and specialty equipment.
   • Action: Update franchise agreements to include compensation calculation methods for early termination.
3. Specific Purpose Funds
   • Introduced reporting obligations for “specific purpose funds”, which includes any funds required to be paid by franchisees during the term of their franchise agreement, and which is to be used for a specific purpose. This has been broadened from the reporting obligations for only marketing and other funds.
   • Action: By 1 November 1 2025, provide clear financial statements, maintain separate bank accounts, and ensure transparency in fund usage.
4. Capital Expenditure Disclosure
   • Franchisors must clearly disclose any significant capital expenditure required to be made by franchisees during the agreement, and discuss with franchisees the expenditure and the circumstances which the franchisor considers that the franchisee is likely to recoup that expenditure.
   • Action: By 1 November 2025,  Franchisors should review and update disclosure documents to include detailed information on potential significant capital expenditures, and establish procedures to keep record of those discussions with franchisees.
5. Restraint of Trade Clauses
   • Increased restrictions on enforcing restraint of trade clauses under certain conditions.
   • Action: Review and potentially revise franchise agreements, considering longer-term agreements and other strategies to mitigate risk of competition by ex-franchisees.
6. Return on Investment Provisions
   • Franchise agreements must provide a reasonable opportunity for franchisees to make a return on any investment (including significant capital expenditure) required by the franchisor as a part of entering into, or under, the agreement.
   • Action: Assess and potentially adjust financial models and franchise terms to ensure compliance with this requirement. Ensure that the franchisee’s possibility of recoupment is reasonable and practical given the circumstances of the potential franchised business.
7. Increased Penalties and Public Naming
   • Higher penalties for non-compliance with ADR procedures and potential public naming of non-compliant franchisors by the Ombudsman.
   • Action: Review and strengthen compliance policies to avoid penalties and reputational damage.

Franchisors should start preparing for these changes immediately to ensure compliance and avoid potential legal and financial risks associated with the increased obligations under the New Code.

The Government is still also looking at the development of a licensing regime for the wider franchising industry. We have previously written on this proposed licensing regime in an Insight which can be accessed here: New path for franchising: Government seeks feedback on proposed licensing regime – RedeMont. The Government has shifted focus from a more comprehensive model to a simplistic framework that will likely involve use of the Franchisor Disclosure Register, however details of this proposal are yet to be finalised. We will provide an update when more information is available.

To ensure that you meet these increased obligations under the New Code, please do not hesitate to contact our Commerce, Franchising and Brands experts for assistance in updating your franchise agreement and disclosure document.