Navigating the 2025 Franchising Code of Conduct Reforms: What Small Businesses Need to Know

The Australian franchising landscape is undergoing a significant transformation with the introduction of the new Franchising Code of Conduct, effective from 1 April 2025. These reforms aim to enhance fairness, transparency, and accountability within the franchising sector, impacting both franchisors and franchisees. For small businesses engaged in franchising, understanding and adapting to these changes is crucial.

Overview of the New Code

The updated Franchising Code of Conduct applies to all franchise agreements entered into, renewed, extended, or transferred on or after 1 April 2025. Existing agreements signed before this date will continue under the previous code until they are altered in any of these ways. Some provisions of the new code will become mandatory from 1 November 2025, providing a transitional period for compliance.

Key Changes and Their Implications

1. Reasonable Opportunity for Return on Investment

Franchise agreements must now provide franchisees with a reasonable opportunity to achieve a return on their investment during the term of the agreement. Previously applicable only to motor vehicle dealerships, this requirement now extends to all franchises. This change ensures that franchisees are not subjected to business models that are unlikely to yield a fair return.  See reg 44 of the Code.

2. Compensation for Early Termination

If a franchisor terminates a franchise agreement early for reasons such as withdrawing from the Australian market, rationalising its network, or changing its distribution model, they are required to compensate the franchisee. Compensation must cover aspects like lost profits, unamortised capital expenditure, and costs associated with winding up the franchised business.  See reg 43 of the Code.

3. Changes to Disclosure Requirements

The obligation to provide a separate Key Facts Sheet has been removed. Franchisors must now include all essential information within the main disclosure document, simplifying the pre-entry disclosure process. Additionally, franchisors are required to disclose significant capital expenditure (reg 47) and provide additional information when franchisees pay into a specific purpose fund - see point 6 below (reg 61).

4. Restrictions on Restraint of Trade Clauses

Franchisors cannot enforce restraint of trade clauses if:

• The franchise agreement has expired.

• The franchisee sought to renew the agreement on the same terms.

• The franchisee was not in serious breach of the agreement.

This change aims to prevent unfair restrictions on franchisees post-agreement (reg 42).

5. Enhanced Penalties for Non-Compliance

All substantive obligations under the new Code are subject to civil penalties. Penalties can be up to 600 penalty units (equivalent to $198,000) per contravention. This underscores the importance of compliance with the new regulations.

6. Introduction of 'Specific Purpose Funds'

The new Code introduces the concept of 'specific purpose funds,' encompassing marketing, cooperative, and other funds designated for specific purposes like conferences or IT systems. Franchisors are required to maintain transparency in the management and reporting of these funds, including providing financial statements detailing the percentage of fund income spent on costs. 

Transition Period and Compliance Timeline

While the new Code took effect from 1 April 2025, certain provisions, such as the requirements for compensation on early termination and the obligation to provide a reasonable opportunity for return on investment, become mandatory from 1 November 2025. This transitional period allows franchisors time to adjust their agreements and disclosure documents to comply with the new regulations.

Practical Steps for Small Businesses

To navigate these changes effectively, small businesses involved in franchising should:

1. Review and Update Franchise Agreements: Ensure that all new, renewed, extended, or transferred agreements comply with the new Code. 

2. Revise Disclosure Documents: Update disclosure documents to include all required information, eliminating the separate Key Facts Sheet.

3. Assess Financial Models: Evaluate whether the franchise model provides a reasonable opportunity for franchisees to achieve a return on investment.

4. Prepare for Potential Compensation: Understand the circumstances under which compensation for early termination is required and plan accordingly.

5. Ensure Transparency in Fund Management: Maintain clear records and reporting for any specific purpose funds, as mandated by the new Code.

6. Seek Legal Advice: Consult with legal professionals to ensure full compliance with the new regulations and to understand the implications for your specific business situation.

Conclusion

The 2025 reforms to the Franchising Code of Conduct represent a significant shift towards greater fairness and transparency in the franchising sector. For small businesses, these changes necessitate a thorough review of existing practices and documentation to ensure compliance and to safeguard the interests of both franchisors and franchisees. Proactive engagement with these reforms will position businesses to thrive in the evolving franchising landscape.