On 9 October 2024, the Treasury released the exposure draft of the new Franchising Code. We’ve taken a close look and outlined the key changes below. The good news? The changes aren’t drastic and align with our previous predictions, as mentioned in our earlier article linked here. While some updates to franchise documents will be needed, this won’t require a full rewrite. The proposed code actually simplifies several areas, including disclosure and the franchise grant process for multi-unit holders.
Check out our table below for a breakdown of the changes and their impact on franchisors. We’ll reach out to our franchisor clients in early 2025, once the final form of the New Code is confirmed (expected by February), to outline the necessary practical steps. The full exposure draft is linked here for those keen on a bit of light reading, and remember—submissions are open until 29 October if you want to have your say!
| Clause | Change | What it means for Franchisors |
| General – form | “Clauses” will now become “Sections” | While predominantly a matter of semantics, all references to ‘clauses’ of the Code as contained in Franchise Agreements, Disclosure Documents and similar will need to be amended to refer to ‘sections’. |
| Section 6 | There has been a move away from the use of the concepts of ‘marketing’ and ‘cooperative funds’ to the use of a single concept – ‘specific purpose funds’. | Again, wording will need to be updated to reflect the terminology of the Code. Franchisors should consider if they have additional cooperative funds (beyond their marketing funds) to which the Code applies. |
| Section 14 | A new purpose has been proposed. The new purpose provides “The purpose of this Code is to: (a) regulate the conduct of participants in franchising towards other participants in franchising, in particular to address the imbalance of power between franchisors and franchisees and prospective franchisees; and (b) improve standards of conduct and practice in the industry to minimise disputes through: (i) better disclosure of information, to inform decision-making; and (ii) setting out requirements for franchise agreements; and (c) provide a fair and equitable dispute resolution procedure for disputes arising under this Code or a franchise agreement. | Where the Code itself shall state one of its purposes is to ‘address the imbalance of power’, a consequence could be that provisions are interpreted in the context of that purpose, i.e. in a more ‘franchisee friendly’ manner. This could apply, for example, to the statutory obligation of good faith, and termination obligations. |
| General – disclosure | The Key Facts Sheet is being scrapped. Some minor additions are being added to the Disclosure Document, which will impact the Disclosure Document to be prepared for the 25/26 financial year. | Franchisors will not need to prepare any further Key Facts Sheet, but still need to complete the disclosure document, incorporating the new additions. |
| Sections 22 and 23 | Existing franchisees will have the ability to ‘opt out’ of receiving disclosure documents and of the 14-day cooling off period, allowing them to operate the business immediately. | This will simplify the grant process for multi unit holders. A written opt out notice will need to be prepared in this instance. |
| Section 54 | In certain circumstances, the Franchisee may not issue a dispute notice where they are terminated for a serious breach. Those circumstances are the franchisee no longer holds a licence that the franchisee must hold to carry on the franchised business (finding by a regulatory body) – the franchisee is a company that is deregistered by the Australian Securities and Investments Commission (finding by the Australian Securities and Investments Commission), and – the franchisee is convicted of a serious offence (finding by a court). | This will simplify the termination procedure as applied in these serious circumstances. |
| Part 4/ Section 42 | The compensation for early termination rules now apply to all franchises. A franchisor cannot enter a franchise agreement unless it includes compensation for the franchisee if the agreement is terminated early due to the franchisor withdrawing from the market, restructuring, or changing distribution models. Compensation must cover lost profits, unamortised expenses, loss of goodwill, and winding-up costs. If the agreement isn’t renewed or is terminated early, the franchisor must also buy back or compensate the franchisee for any required stock, equipment, or branded products that can’t be repurposed for another business. | An early termination clause will need to be incorporated into all Agreements to comply with these provisions. Franchisors will need to consider the required expenditure on such items, and budget for buy-backs. |
| 75 | The ASBFEO will now have the power to name franchisors who are a party to a dispute and who have refused to engage in an ADR process or withdrawn from an ADR process. | In order to avoid being ‘named and shamed’, franchisors should ensure they proactively and in good faith participate in all mediations |
| General – penalty provisions | All substantive obligations are now penalty provisions, with maximum penalties of 600 units per breach. | This makes it even more important to ensure Code compliance. |
Key Takeaways
- Changes aren’t drastic but will require minor updates to franchise documents.
- The grant process for multi-unit holders is simplified.
- Franchisors should consider the new expanded purpose as included in the Code.
- Franchisors will need to budget for potential buy-backs or compensation under the new early termination rules.