The new Franchising Code, introduced on 1 April 2025, introduces expanded obligations concerning capital expenditure, increasing transparency and requiring direct discussions between franchisors and prospective franchisees. These changes place additional responsibilities on franchisors to disclose and discuss anticipated capital expenditures, ensuring franchisees have a clearer understanding of the financial commitments they may be required to make.
What is Capital Expenditure?
While the Code does not define “capital expenditure,” its significance varies by industry. Broadly, capital expenditure refers to significant investments in long-term assets required for the operation of a franchised business. What constitutes “significant” capital expenditure depends on the nature of the franchise. For instance:
- Cleaning Franchise: A high-end industrial vacuum cleaner may represent a substantial investment for a franchisee.
- Café Franchise: Significant expenditures often include refurbishment costs, coffee machines, fryers, and kitchen equipment.
- Retail Franchise: The cost of store fit-outs, shelving, and point-of-sale systems may be the most substantial capital investments.
Expanded Disclosure Requirements
Under the Franchising Code, franchisors must disclose significant capital expenditure obligations in the disclosure document before the franchise agreement is signed. The required disclosure must include:
- The rationale for the expenditure.
- The amount, timing, and nature of the expenditure.
- The anticipated outcomes and benefits of the expenditure.
- The expected risks associated with the expenditure.
This information must be as detailed as possible, providing franchisees with a comprehensive understanding of what they may need to invest over the course of their franchise term.
New Discussion Obligations
In addition to expanded disclosure, franchisors must now engage in discussions with prospective franchisees regarding the disclosed capital expenditure before finalizing the franchise agreement. This requirement is codified in Section 47 of the Franchising Code, which states that a franchisor must not enter into, renew, or extend a franchise agreement unless they have discussed:
(a) Any significant capital expenditure disclosed in the disclosure document as mentioned in subsection 20(4); and
(b) The circumstances under which the franchisor considers that the franchisee or prospective franchisee is likely to recoup the expenditure, having regard to the geographical area of operations of the franchisee or prospective franchisee.
Failure to comply with this requirement carries a civil penalty of 600 penalty units.
To ensure compliance with this obligation, franchisors should take proactive steps, including:
- Developing internal processes to document that discussions have taken place.
- Implementing checklists for franchisors and their representatives to follow in capital expenditure discussions.
- Utilizing scripts to guide conversations, ensuring consistency and completeness in communication.
- Maintaining records of discussions with prospective franchisees to demonstrate compliance with the Code.
When Can a Franchisor Require Significant Capital Expenditure?
Franchisors are restricted in when they can require franchisees to undertake significant capital expenditure during the term of the franchise agreement. Under Section 60 of the Franchising Code, a franchisor must not impose such a requirement except in the following circumstances:
(a) The expenditure was disclosed in the disclosure document as required by subsection 20(4), and the disclosure document was provided to the franchisee before the most recent entry into, renewal, or extension of the franchise agreement. (b) The expenditure is to be incurred by all or a majority of franchisees and has been approved by a majority of those franchisees. (c) The expenditure is necessary for the franchisee to comply with legislative obligations. (d) The franchisee has agreed to undertake the expenditure.
Failure to comply with these restrictions carries a civil penalty of 600 penalty units.
These provisions ensure that franchisees are not subjected to unexpected or unjustified financial burdens, reinforcing transparency and fairness in franchising relationships.
Ensuring Compliance and Best Practices
Failure to adequately disclose or discuss significant capital expenditure could lead to serious legal and financial consequences for franchisors. To mitigate risk and foster transparency, franchisors should:
- Conduct regular training for their teams on capital expenditure discussions.
- Establish clear policies and procedures for expenditure disclosures.
- Ensure disclosure documents are reviewed and updated regularly to reflect any changes in capital investment requirements.
The enhanced obligations introduced in the April 2025 Franchising Code represent a shift towards greater franchisee protection and transparency. Franchisors should take these changes seriously, implementing structured processes to meet the new requirements effectively. By doing so, they not only ensure compliance but also build stronger, more trusting relationships with their franchisees.