What reasonable opportunity for a return on investment in a franchise means to the ACCC

The recent reform of the Franchising Code of Conduct (Code) in Australia introduces an essential change for franchise agreements. While most changes came into effect on 1 April 2025, all franchise agreements entered into, renewed, extended or transferred on or after 1 November 2025 must provide a reasonable opportunity for the Franchisee to make a return on any investment required by the Franchisor. The return on investment refers to the Franchisee’s ability to recover the up-front cost of any investment required by the Franchisor at the start or during the term of the agreement.

The ACCC has recently provided its guidance on this term and explained its view on the requirement.

Franchising Code of Conduct: What’s changed?

The new Code means that Section 44 has been used to broaden a prior requirement (which only applied to vehicle dealerships previously), so that now all franchise systems and investment made under them must now satisfy this “reasonable opportunity” test.

The investment can include, without being exhaustive, the franchise fee, lease and fit out costs, initial or new equipment.

The test has been introduced to give a Franchisee a fair chance of recouping its investments and returning a profit. It has not been introduced to require the Franchisor to provide an absolute guarantee of profit and/or business success.

What will count as a “reasonable opportunity” will depend on the franchise system and the terms of each agreement.  According to the ACCC, a variety of factors are relevant, such as the:

• size of the investment
• length of franchise term or remainder of term left if the investment is made during the term
• business model
• costs/fees
• location
• market conditions
• Franchisor support

While not stated in the ACCC’s list, we also consider a key element is the value of the investment at the end of the term.  A depreciated value of fit out (if recoverable) or equipment (if saleable) would be relevant to considering the return.

What does the test mean for Franchisors?

If you are a Franchisor, this elevates compliance risk. Franchisors will now need to closely model the investments required in a franchise and likely return scenarios to evidence that its franchise system offers a reasonable opportunity for Franchisees to recover costs and earn an acceptable return.

If a Franchisee fails or there is an equity shortfall from the return on sale or the residual value on franchise expiry, then questions will be asked about the expenditure required and ability to make a return from that expenditure.

The Franchisor will need to establish that, while it may not have occurred in this case, the opportunity existed for a reasonable return.

When considering the factors relevant to  opportunity, the ACCC’s guidance lists many factors. Some are more obvious, such as the size of the investment and the length of the term (or term remaining). The guidance also includes various factors that might not be so obvious, and they are illustrative of the ACCC’s very broad view on such an assessment.

For example, it includes that:

• The business model is not misleading, Here, proper disclosure and transparency is key.
• Where the Franchisor has company outlets, the costs and profits of those outlets need to be considered. These will form evidence of performance from which the Franchisor can assess Franchisee likely performance.
• The Franchisor should not charge excessive fees.
• Realistic, evidence-based financial information is provided to prospective Franchisees during disclosure.
• The Franchisor carefully considers its Franchisee selection criteria so that it avoids granting a franchise to a prospective Franchisee that does not have the skills and experience necessary to have a chance of success.
• Markets have been assessed and Franchisors are mindful of granting franchises into saturated or highly competitive markets. The achievable returns for that Franchisee may well be lower or less certain.

For a prospective Franchisee, this change will strengthen bargaining power and allow a potential Franchisee to ask questions about investments required, likely returns and historical trends. This may prompt a greater level of negotiations, especially about fees and duration of the franchise agreement.

Franchisees may have genuine arguments to reject further investment requirements in extra fit out, refurbishments or new equipment unless the Franchisor can adequately explain the rationale for its need and financial modelling of the investment return.

This change is aiming to create greater fairness and transparency and reduce the power imbalance between a Franchisee and Franchisor.

Reasonable opportunity for a return on investment: Key takeaways

• Franchisors should take this time to review and update their disclosure document and franchise agreements to include data or reasoning evidencing how the Franchisee’s investment can be recouped within the term of the agreement.
• Prospective Franchisees should perform due diligence on Franchisors, asking for realistic financial models, comparing investment size to term length and scrutinising higher cost items and checking whether the term is long enough to recover the outlay.
• Both parties should recognise that the term of the agreement may need to be aligned with the size of the investment.
• All parties to the franchise relationship must be clear that this reform does not eliminate risk for Franchisees or guarantee profit, but it holds Franchisors more accountable.
• We consider that if a franchise agreement does not have a renewal term, then serious consideration should be given to including one. While franchisee performance and pre-conditions to earn the renewal may still be included, the potential for renewal will be relevant by when assessing the time available to recoup an investment.

For assistance with reviewing or amending a franchise agreement or for further information, please reach out to our Franchising lawyers. Having advised franchisors, based both locally and overseas, our lawyers have unique insight into the Franchising Code of Conduct and the importance of commerciality and compliance within the industry.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.