In this article we consider the "return on investment" requirement which applies to franchise agreements entered into, renewed or extended on or after 1 November 2025 (except for those new vehicle dealership agreements entered into prior to 1 November 2025 which are covered by the previous regulations).
The "return on investment" obligation requires franchisors to ensure franchise agreements provide franchisees with a “reasonable opportunity” to make a return on certain investments within the term of the agreement.
Both franchisors and franchisees have asked us what the "return on investment" obligation means, and in particular what franchisors need to build into their current franchise agreements to ensure that they meet the obligation.
The new return on investment obligation was introduced in the April 2025 Franchising Code of Conduct ('the Franchising Code').
While the return on investment obligation was already included in the Franchising Code in respect of new vehicle dealership agreements, for franchise agreements other than new vehicle dealership agreements, the obligation (contained in section 44 of the Franchising Code) came into effect on 1 November 2025.
The obligation is framed as a “must not enter into” prohibition: a franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity, during the term of the franchise agreement, to make a return on any investment required by the franchisor as part of entering into, or under, the franchise agreement.
The focus is on whether the franchise agreement’s terms, in substance, provide that opportunity, rather than on any promise of performance outcomes.
The obligation does not require the franchisor to guarantee the profitability or success of the business. Neither does the obligation remove the risks of running a business.
The return on investment concept is tied to “any investment required by the franchisor” as part of entry into the agreement, or required under (or during) the agreement—meaning it is directed to mandatory expenditure obligations imposed by the franchisor rather than any discretionary spending by the franchisee.
The case of AHG WA (2015) Pty Ltd v Mercedes-Benz Australia/Pacific Pty Ltd [2023] FCA 1022 emphasises that when considering investments made as part of the entry into the agreement, any previous investment in the business or the site will not be taken into account.
In that case (which refers to the previous return on investment requirements for new vehicle dealership agreements) the primary judge Beach J considers whether the agency agreement allowed the dealers a reasonable rate of return on their investment. Beach J states at paragraph 3614:
[...] the agency agreements do not in any event require new capital investment by the dealers. And as for investments made by the dealers under the dealership model, they were free not to enter into the new agency agreements and to deploy their built up capital elsewhere. [...] Further, in relation to past investments, for all I know the dealers have received both a reasonable rate of return on their capital and also recouped over time the capital invested.
The reasonableness of the opportunity is not expressed as a fixed formula and instead depends on the terms of each franchise agreement.
As we discussed in our article "Franchising Code 2025 Exposure Draft - Before Entering into a Franchise Agreement", the Explanatory Statement released with the draft Code explains that what is considered "a reasonable opportunity" will be specific to the terms of the franchise agreement, the costs paid and the length of the franchise agreement.
Additionally as we referred to in our new year article "Franchising Update 2026" the ACCC has indicated that the following factors may be relevant to whether the franchisee has been given "a reasonable opportunity" to make a return on investment:
the duration of the agreement,
First, the duration of the franchise agreement should be long enough to allow a franchisee to make a return on investment.
This will need to be considered on a case by case basis and may require a franchisor to increase the standard duration of a franchise agreement where the franchisee is making a considerable investment.
Any additional provisions of the franchise agreement which may affect the duration of the franchise agreement should also be considered.
In the frequently cited case of Lanhai Pty Ltd and Ors v 7-Eleven Stores Pty Ltd [2022] VSC 132 the term of the franchise agreement expired on the earlier of three conditions:
the franchise agreement term of 10 years;
The franchisor chose not to renew the lease and the franchise agreement ended after approximately 6 years.
The franchisee had paid $796,000 to acquire the business and understood that the franchise agreement term was 10 years, but was unable to continue to operate the business after 6 years. As a result, the actual term of the agreement was 6 years.
That case was concerning misleading and deceptive conduct, but under the new return on investment requirements, if the franchisee had not had a reasonable opportunity to make a return on their investment in those 6 years, the franchisor could not rely on the fact that the term of the agreement could have been as much as 10 years to prove they had met their return on investment obligations.
The ACCC has also recommended that franchisors seek to align the term of the franchise agreement with the lease so that any costly landlord refurbishments are not required towards the end of the franchise agreement term.
Further, the operational terms of the franchise agreement should be fair and reasonable and fees should not be excessive.
In addition to the terms of the franchise agreement itself, the ACCC has indicated that a franchisor may also take into account additional matters such as:
ensuring that the business model is not flawed or misleading,
Alongside the “reasonable opportunity” requirement, section 44 of the Franchising Code also points to the interrelated discussion obligation in section 47: if expenditure is disclosed in a disclosure document for a franchise agreement, the circumstances in which the expenditure is likely to be recouped must be discussed.
The discussion obligation arises where the disclosure document discloses that significant capital expenditure will be required during the term of the franchise agreement. Again the discussion obligation is a “must not enter into” prohibition: a franchisor must not enter into a franchise agreement unless the franchisor and the franchisee have discussed any significant capital expenditure disclosed in the disclosure document and the circumstances under which the franchisor considers that the franchisee or prospective franchisee is likely to recoup the expenditure.
The obligations relating to significant capital expenditure (including the section 47 obligation to have a discussion about significant capital expenditure) are applicable to any significant investment required to be made under (or during the term of) the franchise agreement.
From 1 November 2025, the return on investment requirement effectively shifts attention from disclosure alone to the substantive terms of the franchise agreement, requiring franchisors to ensure the agreement is structured so the franchisee has a reasonable opportunity, during the term, to make a return on franchisor-required investments, assessed in context against the agreement’s particular terms and support arrangements.
The obligation does not however require the franchisor to guarantee the profitability or success of the franchise business.