In Australia, franchise agreements are regulated by the Franchising Code of Conduct, which is set out in the Competition and Consumer (Industry Codes—Franchising) Regulations 2024 and sits under the Competition and Consumer Act 2010 (Cth). The Code is a mandatory industry code and applies to all franchise agreements in Australia.
Franchising is often seen as a quicker way to grow a business or enter an established brand. But before you sign anything, the franchise agreement is the document that will control how the relationship works in practice. For business owners, understanding the key clauses in a franchise agreement is critical. These clauses can affect everything from your day-to-day operations to how you exit the business.
What is a Franchise Agreement?
A franchise agreement is a legally binding contract between the franchisor (the brand owner) and the franchisee (the person operating the business).
It sets out:
- How the business must be run
- What fees must be paid
- What rights each party has
For example, if you open a fast-food franchise or a gym under an existing brand, you are agreeing to follow their systems, branding, and processes.
Key Clauses to Look Out For
1. Fees and Ongoing Payments
Most franchise agreements include:
- Upfront franchise fees
- Ongoing royalties (often a percentage of revenue)
- Marketing contributions
These costs can significantly impact your profitability. For agreements entered into, transferred, renewed or extended on or after 1 November 2025, the agreement must also give the franchisee a reasonable opportunity to make a return on any investment required by the franchisor.
Example:
A retail franchise may require you to pay 6% of your weekly revenue as a royalty fee, regardless of whether you are making a profit.
Risk:
High ongoing fees can put pressure on cash flow, especially in the early stages of the business.
2. Term and Renewal
This clause sets out:
- How long the franchise lasts
- Whether you have a right to renew
Example:
A 5-year franchise term with an option to renew for another 5 years, subject to conditions.
Risk:
Renewal is not always automatic. You may need to meet performance targets or upgrade your premises at your own cost.
3. Territory and Exclusivity
This determines whether you have exclusive rights to operate in a specific area.
Example:
A fitness franchise may give you exclusivity within a certain suburb or postcode.
Risk:
If exclusivity is limited or unclear, the franchisor may open another location nearby, increasing competition.
4. Control and Operations
Franchisors usually retain significant control over:
- Branding and marketing
- Suppliers
- Pricing and promotions
- Business systems
Example:
A fast food franchise may require you to purchase ingredients from approved suppliers only.
Risk:
You may have limited flexibility to make business decisions, even if local conditions change.
5. Restraint of Trade
This clause may restrict you from operating a similar business after the franchise ends. However, under the Franchising Code, restraint of trade clauses may not be enforceable in certain non-renewal situations, particularly where the franchisee has complied with the agreement and the franchisor refuses to renew. However, restraints may still apply where the agreement ends early due to a breach by the franchisee.
Example:
You may not be allowed to open a competing café within a certain radius for a set period of time.
Risk:
This can limit your ability to continue in the same industry after exiting the franchise.
6. Termination Rights
This outlines when the agreement can be terminated.
Common triggers include:
- Breach of contract
- Failure to meet performance standards
- Non-payment of fees
In addition, unconscionable conduct provisions under the Competition and Consumer Act 2010 (Cth) may apply where termination is exercised unfairly.
Example:
For example, a franchisor may terminate the agreement if a franchisee repeatedly fails to meet operational standards, such as food safety requirements, or does not remedy a breach within the required timeframe after receiving notice.
Risk:
Some agreements give franchisors broad termination rights. However, under the Franchising Code, termination must follow certain requirements, including providing notice and, in many cases, an opportunity to remedy the breach. Despite these protections, early termination can still leave franchisees exposed to significant financial loss, including unrecovered setup costs and ongoing liabilities.
7. Transfer and Exit
This clause governs whether you can sell your franchise.
Example:
You may need the franchisor’s approval before transferring ownership.
Risk:
Restrictions on sale can make it harder to exit or realise the value of your business.
Why These Clauses Matter
These clauses are not just legal terms. They directly affect:
- How much control you have
- How much you earn
- How easily you can exit
For many franchisees, the biggest issues arise when they realise they have less flexibility than expected or underestimated the financial commitments.
What Business Owners Should Do
Before entering into a franchise agreement, you should:
- Carefully review all fees and financial obligations
- Understand how much control the franchisor will have
- Check whether your territory is protected
- Consider how you will exit the business in the future
- Seek legal advice before signing
Taking the time to assess these clauses can help you avoid costly surprises later.
Franchisees in Australia may also have a cooling-off period (generally 14 days) after signing the agreement, allowing them to exit early in certain circumstances. Under the Franchising Code, both franchisors and franchisees must act in good faith in all dealings, including during negotiations, performance, and termination of the agreement. This aligns with the approach taken in Australian courts, which have emphasised good faith in franchise dealings, including in cases such as Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187.
Final Thoughts
Franchising can offer a structured and proven business model, but it also comes with strict legal obligations. Understanding the key clauses in a franchise agreement will help you make an informed decision and reduce the risk of disputes down the track. Breaches of the Franchising Code can result in significant penalties, as seen in ACCC v Ultra Tune Australia Pty Ltd [2019] FCA 12, where the franchisor was penalised for failing to comply with its obligations under the Code.
OpenLegal Services
At OpenLegal, our team can assist with reviewing franchise agreements and advising on your rights and obligations before you commit. To further discuss, please contact us at enquiries@openlegal.com.au or 1300 337 997.
Riya Dhillon, Intern at OpenLegal
