A reasonable chance to earn back the investment: setting term length under s44

• Breach carries up to 600 penalty units, which is $218,400 per contravention from 1 July 2026 (s44(2)).
• The ACCC's example: where payback on an undeveloped site is likely to take about 4 years, a 5-year term is unlikely to be a reasonable opportunity.
• Whether an opportunity is reasonable depends on each agreement, judged on factors such as term, investment, location, fees, competition and support.
• Significant capital expenditure the franchisor discloses must be discussed before signing, including how the franchisee is likely to recoup it in their area (s47).
• New car dealership agreements have their own version, s46, which sits in the Code's higher penalty tier.

The ACCC's October 2025 guidance says it means what a typical person would see as fair and reasonable. Its list of relevant factors groups like this:

• The agreement: its duration, and its terms and conditions.
• The money: the amount of the investment, and the costs and fees the franchisee pays.
• The business: the underlying business model and the type of business.
• The market: location, competition, economic conditions and regulation.
• The people: the franchisee's skills and resources, and the level of support the franchisor gives.
• What it isn't: the ACCC says a reasonable opportunity doesn't mean the franchisor guarantees profit or success, and doesn't remove the inherent risks of running a business.
• What it is: the ACCC describes a return on investment as recovering the up-front investment the franchisor requires and still making an ongoing profit, within the life of the agreement.

The ACCC's case study involves a fast-food franchisor that requires a large store fit-out and costly equipment.

• The franchisor knows from industry data, previous franchisees in similar circumstances and its business model that a return on investment for an undeveloped site is likely to take 4 years.
• The ACCC says a 5-year term is unlikely to provide a reasonable opportunity for a return, given that timeline and the high set-up costs, especially if margins are also tight.
• Its advice is to offer a longer term so the franchisee can recoup costs, establish the store and become profitable, and to discuss and disclose the required investments.
• The lesson: a term that ends soon after payback leaves little or no period of return, and any ramp-up delay or mid-term refit pushes payback closer to the end.
• The ACCC also flags misaligned leases: if the lease and franchise terms don't line up, a landlord's refurbishment requirement late in the term may not be recoverable.

For franchisors, this is the working behind a defensible term. Run it for each site type you offer.

1. Total the investment you require. The ACCC lists costs such as the franchise fee, fit-out of the premises, lease costs, and buying or leasing equipment.
2. Add the significant capital expenditure you will require during the term, such as a scheduled refit or technology upgrade, in the year it falls.
3. Build yearly net cash flow for a typical site of that type and location from your network data, including the costs and profits of your own outlets, as the ACCC suggests.
4. Deduct all ongoing costs: royalties, fund contributions, rent, wages at no less than minimum statutory entitlements, other operating costs, and a market salary for an owner who works in the business.
5. Allow for a ramp-up period in which cash flow is lower.
6. Work out the payback year, then check how many years of return the term leaves after it.
7. Stress-test lower sales, higher costs and a delayed opening, and check the lease term, options and landlord refurbishment clauses against the franchise term.
8. Record your assumptions and data. If they support statements in the disclosure document, keep them for 6 years after the document was last given (s37(2)).

Illustrative only. Assume a required investment of $350,000, then net cash flow of $30,000 in year 1 while the site ramps up and $80,000 a year after that. Cash flow is after all operating costs, fees and an owner's salary, before tax and finance costs, and the maths ignores the time value of money.

• Cumulative cash flow is $30,000 after year 1, $110,000 after year 2, $190,000 after year 3, $270,000 after year 4 and $350,000 after year 5.
• Payback lands at the end of year 5. On a 5-year term the franchisee only gets their money back, with no return, which is unlikely to be reasonable.
• On a 10-year term, years 6 to 10 would add $400,000 of cash flow after payback, before any further capital spending.
• Add a required $100,000 refit in year 5 and the total investment becomes $450,000. Cumulative cash flow reaches $430,000 by the end of year 6, so payback moves to about 6.25 years.
• On a 7-year term, that refit leaves only about three-quarters of a year of return, which is why capex timing matters as much as term length.

• Section 44 looks at the opportunity 'during the term of the agreement'. Don't rely on a renewal option to rescue a term that is too short to recoup the investment; get advice if your model depends on renewal.
• Required spending late in the term leaves less time to recoup it. Disclose it (items 14(1A) and 14(1B)), discuss recoupment for the franchisee's area (s47), and say whether you'll consider it at the end of the term (item 18(1)(g)).
• If you end an agreement early because you withdraw from the market, rationalise your network or change your distribution model, s43 compensation must take account of unamortised capital expenditure you requested.
• Selling a company-owned store: the ACCC says the price you charge, including goodwill, must be reasonable given the store's trading data, comparable stores and the length of the agreement.
• Resales between franchisees: the ACCC says to make sure the buyer understands the costs and risks and has a reasonable opportunity to earn a return, including on any landlord-required refit, while not unreasonably withholding consent.
• Renewals and extensions from 1 November 2025 are covered too, so re-run the payback test for any investment required in the new term.

• The date: s44 applies only to agreements entered into, transferred, renewed or extended from 1 November 2025.
• The term in item 18 of the disclosure document, and whether you have an option to renew. If you don't, the document must say so in bold type (items 18(3) to 18(5)).
• The investment: the establishment costs in item 14(3) and any significant capital expenditure in items 14(1A) and 14(1B), including when it falls.
• The lease: its length, options and any landlord refurbishment clauses, compared with the franchise term.
• The franchisor's view of payback in your area, which it must discuss before signing if capex is disclosed (s47). Ask what data it's based on.
• Your own numbers: have an accountant build a cash-flow forecast and payback, and compare them with the term.
• Former franchisees: ask how long it really took them to recoup their investment. Their contact details are in the disclosure document.

The ACCC lists situations where a reasonable opportunity is less likely to have been provided. Watch for these:

• The term is short by industry standards and for the underlying business model.
• The franchise term and the lease don't line up, so a landlord refit late in the term can't be recouped.
• The investment is high by industry standards, but turnover or profit is below average.
• It's hard to make a profit after franchise fees and other operating costs.
• Profit or earnings projections have turned out to be misleading.
• Too many outlets or competitors are competing in one area.
• The same location has previously been run at a loss.

• Payback for each site type is modelled, stress-tested and documented.
• The term leaves a genuine period of return after payback, including required capex.
• Franchise and lease terms are aligned, or the gap is disclosed and discussed.
• Capex is disclosed, and the s47 discussion is minuted.
• Resale and company-store pricing is checked against trading data.
• Buyers have compared their own payback forecast with the term before signing.