New Franchising Code Rule: Franchisors Must Give Franchisees a Real Opportunity to Make a Return on Investment
- 5 days ago
- 6 min read
There's a new rule in the Franchising Code of Conduct.
It sounds simple.
Franchisors must give franchisees a reasonable opportunity to make a return on investment.
Most founders will read that sentence, nod, and move on. "Of course we give franchisees a return. That's the whole point of franchising."
That's the kindergarten version.
The real version is uncomfortable. Because most franchise systems in Australia were never built with this question in mind. They were built around franchisor revenue; franchise fees, royalties, marketing levies, supply chain margins, and franchisee return was assumed, not engineered.
And I can vouch for it too. These past weeks we have been delivering economic models to a number of clients using their proposed fees and royalties. Margins for franchisees seem like an afterthought.
The regulator just changed that.
What the New Rule Actually Says
Under the updated Franchising Code of Conduct, applying to all franchise agreements entered into, renewed, or extended on or after 1 November 2025, franchisors must provide franchisees with a reasonable opportunity to make a return on any investment required during the term of the agreement.
That investment includes:
Initial franchise fees
Premises fit-out costs
Lease or occupancy costs
Equipment purchase or leasing
Other required capital expenditure
To be clear: This is not a profit guarantee. The Code does not promise franchisees they'll make money, and it doesn't remove the inherent risk of running a business.
What it does require is that the structure of the franchise system and the terms of the agreement create a genuine pathway for a franchisee to recover their investment and have a real shot at a return.
That's a structural test. Not a marketing promise.
What Counts as "Reasonable"?
The ACCC has framed "reasonable opportunity" as an objective test, essentially, what a sensible, informed person would consider fair in the circumstances.
Factors that come into play include:
The length of the franchise agreement
The terms and conditions of the agreement
The underlying business model
The level of investment required
The type of business and location of the outlet
Operating costs and franchise fees
Economic conditions and market competition
The skills, experience, and resources of the franchisee
The level of support provided by the franchisor
Notice what's on that list. It's not just legal drafting. It's commercial architecture, fees, costs, territory, support, and timeframe, all working together.
Because every franchise system is different, there's no single number or formula that satisfies the rule. What's "reasonable" for a $60,000 mobile service franchise looks completely different to what's reasonable for a $450,000 retail fit-out. The test is always relative to the model.
Which is exactly why this rule matters so much for franchisors preparing, or re-preparing, their systems.
What Franchisors Need to Review Before Signing Agreements
If you're a franchisor, or about to become one, there are three areas the ACCC guidance points to directly. Get these wrong, and you're not just exposed to franchisee dissatisfaction. You're exposed to regulatory risk.
1. Is the Agreement Term Long Enough?
The duration of the franchise agreement needs to give a franchisee enough time to recover their capital investment and generate a return.
If your system requires a six-figure upfront investment but only offers a three-year term with no guaranteed renewal, that's a problem. Not eventually. Now.
Franchisors preparing their model need to ensure:
Capital investment requirements are proportionate to the business model
The agreement term is long enough for the franchisee to realistically recoup their investment
Any unusual industry practices (short terms, no renewal rights, etc.) are clearly disclosed and justified
2. Are the Commercial Terms Actually Fair?
This is where most franchise systems fall down, because the commercial terms were set by guesswork, by copying a competitor, or by working backwards from "what we need to charge to make this worthwhile for us," with franchisee economics as an afterthought.
The ACCC guidance points to:
A business model that isn't structurally flawed or misleading
Fees and royalties that don't strip out the margin before the franchisee even opens the doors
Realistic, evidence-based financials, not aspirational best-case scenarios
No oversaturation of territories that cannibalise franchisee revenue
No structural advantage for franchisor-owned outlets over franchisee outlets
Proper franchisee selection criteria, so the wrong person isn't set up to fail
Genuine, ongoing training and operational support
If a prospective franchisee lacks experience in your category, the obligation to provide support increases. You can't sell a turnkey business and then leave the new operator to work it out themselves.
3. Is Capital Expenditure Properly Disclosed?
This is the part that turns a commercial oversight into a legal breach.
Franchisors must:
Include all significant capital expenditure in the disclosure document
Discuss those costs openly with prospective franchisees, before they sign
Explain how the franchisee is realistically expected to recoup that expenditure
Vague references to "ongoing investment may be required" don't cut it anymore. If there's a fit-out refresh every five years, a technology upgrade cycle, or mandatory equipment replacement, it needs to be in the disclosure document, with a credible explanation of the payback.
Get this wrong, and you're not just on the back foot in a dispute. You're in breach of the Code.
The Real Shift: From Selling Franchises to Engineering Outcomes
Here's the uncomfortable truth for a lot of franchisors.
This rule formalises something that good operators were already doing, and exposes the systems that weren't.
If your franchise system relies on:
Unrealistic financial assumptions in your marketing
Franchise fees and upfront investment that are excessive for the model
Short agreement terms with no clear renewal pathway
High royalty structures that leave thin operating margins
…you're now sitting in the regulator's spotlight. Not because someone's watching every franchisor, but because the moment a dispute lands, the first question will be: Did this franchisee ever have a reasonable shot at a return?
If the honest answer is no, that's not a legal technicality. That's a structural failure in how the franchise was designed.
For franchisors who've built their model properly, unit economics tested, fees calibrated, support structures in place, this rule changes very little. It's simply proof of what you already knew: the model works for both sides.
For everyone else, it's a forcing function. And in this market, with rising costs and tighter margins across the board, "the model works on paper" isn't good enough anymore. It has to work in practice, for the person writing the cheque.
Where This Leaves You
The new return-on-investment requirement is another step toward strengthening fairness and transparency in Australian franchising, and it's not going away.
Franchisors should be reviewing:
Agreement terms and renewal structures
Investment levels relative to the business model
Disclosure documents, particularly around capital expenditure
Training and support structures, especially for less experienced franchisees
Prospective franchisees should be asking the same questions from the other side of the table: Does the timeframe, investment level, and operating model realistically allow for a return, or am I being sold a story?
This is exactly why franchise development has to start with the numbers, not the legal documents. A lawyer can draft a compliant agreement. They can't tell you whether your unit economics actually stack up for the person buying into your system.
That's a financial modelling problem, and it's the next thing we need to talk about.
In our VIP Franchise Development programs, we perform this modelling and more. It’s deeply strategic and analytical and not something to be left to chance anymore.
In another article, we'll break down how to actually model franchisee ROI: The inputs, the assumptions, and the red flags that show up when a franchise model is built for the franchisor's income, not the franchisee's return.
Speak With a Franchise System Architect
If you are exploring franchising and want to determine whether your business may be ready for franchising, understanding the development process is an important first step.
At Franchising Made Easy®, we help founders design franchise systems that are structurally integrated and capable of sustainable growth.
If you would like to explore how franchising could work for your business, consider speaking with an experienced Franchise System Architect.
Source: Guidance from the Australian Competition and Consumer Commission (ACCC) Small Business team.
This article summarises ACCC information and should not be taken as legal advice. Businesses should seek professional advice from franchising specialists where necessary. If required, we can refer stable, experienced and commercially-minded franchise lawyers.
