Franchise systems evolve.
A new menu is introduced. A supplier changes. A new levy is created. Reporting procedures are updated. A technology platform becomes compulsory.
Operationally, everyone knows what is changing.
Unfortunately, the franchise agreement is not telepathic.
Even a fairly ordinary change can affect the franchise agreement, operations manual, disclosure document and related agreements. It may also apply very differently to existing and prospective franchisees.
So, before announcing the new model to the network—or promising the documents can be updated by Friday—it is worth working through the legal consequences.
“It is only a small operational change”
Famous last words.
A new product, supplier, levy or reporting process may raise questions such as:
- Does the franchise agreement permit the change?
- Is it compulsory?
- Will it cost franchisees money?
- Is new equipment, software or training required?
- Does the franchisee need to enter into another agreement?
- Will the franchisor or an associate receive a rebate or commission?
- Can the change be imposed on existing franchisees?
- Does the operations manual need updating?
- Should the change be captured in the disclosure document or Franchise Disclosure Register?
Suddenly, the small operational change is making itself quite at home throughout the entire document suite.
Start with the franchise agreement
Most franchise agreements give the franchisor some flexibility to develop the system and update operational standards. That flexibility is necessary. A system cannot be expected to operate in exactly the same way for five or ten years.
However, the scope of that flexibility depends on what the agreement actually says.
A menu change may be well within the franchisor’s existing powers. A menu change that also requires a $30,000 equipment purchase is a different proposition.
Similarly, introducing a new reporting template may be straightforward. Requiring franchisees to pay for a new platform and provide continuous access to banking, customer or employee data requires more thought.
The change may interact with provisions dealing with:
- fees and levies;
- products and suppliers;
- training and technology;
- reporting and privacy;
- minimum performance criteria;
- significant capital expenditure;
- default and termination; and
- the operations manual.
Updating one paragraph in the manual will not necessarily be enough if the agreement still describes the old model.
New fees tend to travel
A new fee or levy rarely affects only the fees schedule.
The documents may also need to explain:
- what the payment is for;
- how it is calculated;
- who receives it;
- when it is payable;
- whether it may increase;
- what the franchisee receives in return; and
- whether a separate agreement applies.
For future grants, the fee may also need to be disclosed in Item 14 and reflected in any other relevant establishment or recurring cost information.
The cumulative cost should also be considered. Franchise agreements entered into, renewed, extended or transferred on or after 1 November 2025 must give franchisees a reasonable opportunity to make a return on the investment required by the franchisor during the term.
A modest monthly charge may not look significant on its own. Across a five or ten-year term—and combined with royalties, marketing contributions, technology fees and compulsory purchases—it may be a substantial commitment.
Is there another agreement involved?
Some operational changes introduce a separate software, supply, licence or services agreement.
If entering into that agreement is compulsory, it should not be treated as an afterthought.
The documents should work together and clearly explain:
- who the parties are;
- what services or products are provided;
- what the franchisee must pay;
- how long the agreement lasts;
- whether it ends with the franchise agreement;
- whether a breach of one agreement affects the other; and
- what happens if the supplier or service provider changes.
A franchisee should not discover after signing the franchise agreement that another substantial set of obligations was hiding around the corner.
What about the disclosure document?
The disclosure document is, to an extent, a point-in-time document.
It is generally updated through the annual update process. It does not need to be amended every time an ingredient price changes, a product is added to the menu or a reporting procedure is adjusted.
For franchisors operating on a standard financial year, the annual update is generally due by 31 October. That process provides an opportunity to update fees, costs, supply arrangements and other information to reflect the position of the system at the relevant update date.
Not every operational change requires an immediate update outside that annual process.
However, an earlier review may be needed where:
- the change is a materially relevant fact that must be separately disclosed;
- continuing to issue the existing document could be misleading;
- a new compulsory fee is being added to the franchise agreement offered to prospective franchisees;
- a new related agreement must be signed;
- significant capital expenditure is required; or
- a new specific purpose fund is being created.
The key is to distinguish between an ordinary operational development, which can be captured in the next annual update, and a change that makes the franchise arrangement currently being offered inconsistent with the disclosure document.
The disclosure document does not need to chase every change around the network. It does need to give prospective franchisees a fair and accurate picture of the arrangement they are being asked to enter into.
What about existing franchisees?
Updating the template for future franchisees does not automatically change existing agreements.
An existing agreement generally cannot be changed unless:
- the franchisee agrees; or
- the agreement already gives the franchisor a valid right to make the change.
The Code also prevents retrospective variation without the franchisee’s written consent.
A broad power to update the operations manual is not necessarily a magic wand. The manual can be used to develop operational standards, but it should not be treated as an easy way to introduce substantial new fees or rewrite the commercial bargain.
Unrestricted variation powers may also create unfair contract terms risks.
Before applying a change to existing franchisees, consider whether:
- the agreement permits it;
- the change is genuinely operational or actually contractual;
- a new financial obligation is being imposed;
- franchisee consent is required;
- a variation deed is appropriate; or
- the change should instead be introduced on renewal.
“Everyone will benefit from it” is not, by itself, a contractual variation mechanism.
A quick pre-launch checklist
Before implementing an operational change, ask:
- What exactly is changing?
- Is it compulsory?
- What will it cost franchisees?
- Does the franchise agreement permit it?
- Can it apply to existing franchisees?
- Is a new supplier or related agreement involved?
- Are there new fees, rebates or financial benefits?
- Does the operations manual need updating?
- Can the disclosure document wait until the annual update, or is earlier attention required?
- Are any current grants already in the disclosure process?
It is much easier to answer those questions before the network announcement goes out.
The short version
Franchise systems need to evolve, and not every operational change requires a full rewrite of the documents.
But some do have wider legal consequences than first expected—particularly where they introduce a new cost, related agreement or substantial obligation.
So, by all means, change the business model.
Just remember to tell the franchise agreement.
Magnolia Legal assists franchisors with implementing operational changes across their franchise agreements, disclosure documents and related agreements. If your system has evolved but your documents have not quite caught up, please get in touch before the next grant is issued.
This article contains general information only and does not constitute legal advice. Advice should be obtained about your particular circumstances.