One of the most common areas of confusion under the Franchising Code of Conduct is the difference between the consideration period and the cooling-off period.
Although both periods are generally 14 days, they operate at different stages of the franchising process and serve very different purposes.
In simple terms:
- Disclosure triggers the consideration period, which occurs before the Franchise Agreement is signed.
- Signing the Franchise Agreement triggers the cooling-off period, which occurs after the Franchise Agreement has been entered into.
Understanding the distinction is important for both franchisors and prospective franchisees. For franchisors, compliance is mandatory and failure to comply can attract significant civil penalties. For prospective franchisees, these statutory protections provide valuable opportunities to properly assess the investment before, and in some circumstances after, entering into the Franchise Agreement.
Step 1 – Disclosure is provided
The process begins when the franchisor provides the prescribed disclosure documents to the prospective franchisee.
In most cases, the franchisor must provide:
- a copy of the Franchise Agreement in the form in which it is intended to be executed;
- the current Disclosure Document;
- a copy of the Franchising Code of Conduct; and
- where the franchisor proposes to lease premises to the franchisee or grant a right of occupancy, copies (or summaries) of the relevant lease documentation and any applicable lessor disclosure information.
The purpose of this disclosure is to ensure the prospective franchisee has sufficient information to properly assess the proposed investment before making a legally binding commitment.
Step 2 – The consideration period begins
Once the required documents have been provided, section 23 of the Code requires the franchisor to wait at least 14 days before executing the Franchise Agreement.
This mandatory waiting period is known as the consideration period.
Its purpose is to provide the prospective franchisee with adequate time to:
- review the franchise documentation;
- obtain independent legal, accounting and business advice;
- undertake further due diligence;
- ask questions of the franchisor; and
- determine whether proceeding with the franchise is commercially appropriate.
Importantly, the franchisor cannot simply shorten or ignore this period because both parties are ready to proceed. Compliance with the consideration period is mandatory.
The consideration period can restart
The 14-day consideration period does not necessarily run only once.
The Code provides that a fresh consideration period will generally commence if, after the initial disclosure but before execution:
- the franchisor makes a material change to the Franchise Agreement (other than certain minor amendments, corrections or changes requested by the prospective franchisee); or
- the franchisor provides earnings information relating to the franchise.
The purpose of these provisions is to ensure the prospective franchisee always has sufficient time to consider the final documents and any new information before signing.
What happens if money is paid during the consideration period?
The Code also contains an important protection regarding payments.
If the prospective franchisee pays money (or other valuable consideration) to the franchisor or an associate during the consideration period in connection with the proposed Franchise Agreement, and subsequently requests repayment during that period, the franchisor must refund those monies within 14 days.
Failure to comply can expose the franchisor to significant civil penalties.
Step 3 – The Franchise Agreement is signed
Once the consideration period has expired, the parties may proceed to execute the Franchise Agreement.
At that point, an entirely different statutory protection begins.
This is known as the cooling-off period.
Unlike the consideration period, which exists before the agreement is entered into, the cooling-off period operates after the Franchise Agreement has been signed.
Step 4 – The cooling-off period begins
For most new Franchise Agreements, section 50 of the Code gives the franchisee a statutory right to terminate the Franchise Agreement within 14 days after entering into it.
The purpose of the cooling-off period is different from the consideration period.
Rather than providing time to review documents before signing, it allows the franchisee one final opportunity to reconsider the decision after the agreement has become legally binding.
If the franchisee validly exercises the cooling-off right, the franchisor must generally repay all monies paid under the Franchise Agreement within 14 days.
Unlike the repayment provisions during the consideration period, however, the franchisor may deduct reasonable expenses associated with the termination, provided those expenses (or the method for calculating them) are expressly disclosed in the Franchise Agreement.
Additional cooling-off rights where premises are involved
The Code recognises that occupancy arrangements are often one of the most significant commercial commitments associated with purchasing a franchise.
Accordingly, where the franchisor proposes to lease premises to the franchisee or grant another right of occupation, additional cooling-off rights may arise if:
- the franchisee does not receive the proposed lease or occupancy terms until after entering into the Franchise Agreement; or
- the final lease or occupancy arrangements differ materially from those previously disclosed (other than changes requested by the franchisee).
These provisions ensure that a franchisee is not committed to a Franchise Agreement without first having a proper opportunity to consider the terms upon which the franchised business will occupy the premises.
The key takeaway
Although the consideration period and cooling-off period are often confused, they perform very different functions.
The consideration period is a mandatory waiting period designed to ensure prospective franchisees have sufficient time to review the franchise documentation and obtain independent advice before becoming legally bound.
The cooling-off period arises after the Franchise Agreement has been entered into and provides the franchisee with a limited statutory right to withdraw from the transaction.
For franchisors, careful management of the disclosure process is essential. Seemingly minor events, such as providing updated earnings information or making substantive amendments to the Franchise Agreement, may restart the consideration period and affect the proposed signing date.
For prospective franchisees, understanding when each period commences—and the different rights that arise during each—is equally important. The consideration period provides an opportunity to properly assess the investment before signing, while the cooling-off period offers limited protection should the franchisee decide not to proceed after the agreement has been entered into.
At Magnolia Legal, we regularly advise both franchisors and franchisees on compliance with the Franchising Code of Conduct, including the timing of disclosure, execution of franchise documents and the operation of the statutory consideration and cooling-off periods. Careful management of these requirements at the outset of a transaction helps minimise risk and reduces the prospect of costly disputes later in the franchising relationship.