From setting up or expanding a franchise system as a Franchisor to entering, Renewing, or Exiting a Franchise as a Franchisee: Why Expert Advice is Your Best Investment
A franchise is more than a brand and an operating system; it is a complex, long-term commercial contract. Whether you are setting up, expanding as a franchisor or signing your first franchise agreement, preparing to renew, or planning a strategic exit, as a franchisee or franchisor, the steps you take at these key milestones will shape your financial future.
In the Australian market, the regulatory landscape is seeking to put a stronger emphasis on fairness, balance, and transparency. Consequently, navigating these rules (especially the new ones that came in to effect in lasted 2025 Franchise Code of Conduct ("Code") with big $$ financial penalties if you get it wrong) successfully requires what we suggest is a more collaborative approach, with clear communication, and, most importantly, specialised professional support.
The Power of Dual Advice: Legal and Accounting
Entering into or transitioning out of a franchise without independent legal and accounting advice is one of the most common causes of commercial disputes in Australia.
The Accountant's Role: A specialised accountant does not just look at tax compliance. At entry, they stress-test the financial model, analyse establishment costs, and evaluate whether the business model realistically allows for a reasonable return on investment. At exit, they help value the business, assess capital gains tax implications, and assist in structuring the sale of the going concern.
The Lawyer's Role: A franchising lawyer translates the legal terms of the agreement into practical business realities. They ensure you understand your rights regarding term limits, renewal conditions, territory exclusivity, and what happens to the assets and goodwill when the relationship ends.
By securing expert advice early, franchisors can build compliant, resilient networks, while franchisees can safeguard their hard-earned equity.
The Three Franchise Entry Pathways: Navigating the Risks
When entering a franchise system in Australia, prospective franchisees generally face three distinct pathways. Each option requires a completely different approach to legal and financial due diligence.
1. Buying an Existing Franchised Business (Going Concern)
Buying an operating franchise from an existing franchisee is often seen as a lower-risk option because there is an established customer base, immediate cash flow, and historical financial data to analyse. However, this pathway introduces unique legal complexities for both parties, a few of which include:
Agreement Terms: You may be taking over the remainder of the seller's existing term rather than receiving a fresh, full term. This heavily impacts the timeframe to make a return on investment, which is an essential consideration for both franchisors and franchisees.
Franchisor Amendments: Under the document guidelines, you must check whether the franchisor will amend, or require the amendment of, the franchise agreement on or before the transfer. Franchisors need to consider if not putting a franchisee onto a new current agreement may not only have system and brand impact, but whether a transfer triggers new laws applying so that you need to have terms in place to avoid breaching any new laws or updated regulations (of which there has been quite a few in the last few years).
Due Diligence: Your accountant should meticulously audit the seller's actual profit and loss statements, rather than relying on system-wide averages or any franchisor projections. Franchisors need to take particular care in what earnings information they provide as this can trigger additional mandatory disclosures.
2. Establishing a Completely New Franchise Site (Greenfield)
Starting a brand-new site offers the excitement of a fresh build and a clean slate, but it arguably carries the highest establishment risk. There is zero historical performance data for that specific location, which results in both franchisors and franchisees having to arguably do a bit more initial due diligence. As such, some of the considerations parties need to make include:
Establishment Costs: Franchisors need to carefully ensure all establishment costs are properly disclosed and franchisees must carefully review the range of setup costs disclosed in Item 14 of the disclosure document, including equipment, fixtures, leasehold improvements, and required working capital. Franchisors also need to ensure that they take into account all these initial and then any ongoing costs when taking steps to ensure that the offer to any franchisee enables the franchisee to make a reasonable return on investment to meet the Code requirements.
Territory/Site: Both parties should be wanting to ensure that both parties do well, as when both parties do well arguably you have both a stronger franchise system and franchisees. Connected to this both franchisors and franchisees should each individually understand what makes a good site and territory, and each do their own proper due diligence to ensure the site is likely to succeed, noting that some factors can not be anticipated, so there will always be some risk.
3. Re-establishing a Ceased Franchise Site (Brownfield)
This is arguably one of the most commercially sensitive scenarios. This occurs when you take over a site that previously operated as a franchise but ceased trading before you arrived. When a franchisor is considering whether to reopen an area and/or a franchisee if they should take it on, there are a number of matters to be considered, some of these including:
Mandatory Disclosures: Under the Code, the franchisor is legally required to disclose whether the site has been subject to a franchised business in the previous 10 years, and the circumstances under which the previous franchisee ceased to operate.
The History of Failure: Why did the previous operator cease trading? Was it due to high rent, poor local demographics, operational issues, or changing traffic patterns?
Legal and Accounting Safeguards: If parties are considering a ceased site, additional concessions may need to be considered and carefully drafted into agreements to offset the historical site risks, especially when we take into account the Code's return on investment requirements as well as the need to have clear details to avoid later disputes about what each thought the other needed to do or accept.
A few Practical Tips for Franchisors
1. Validate Your Financial Models and Earnings and Site History Disclosures
Before offering a franchise, work with specialised accountants to ensure your business model provides incoming operators with a genuine, objective opportunity to make a reasonable return on their required investment. If you are providing any earnings information (whether this is directly or indirectly) and/or are re-offering a ceased site, ensure your disclosures are completely accurate and provide all required details.
2. Monitor Key Dates and Expiry Timelines
Establish a rigorous tracking system for all agreement end dates. Australia requires franchisors to give formal, written notice of their end-of-term intentions well in advance. Failing to meet these strict notification windows can disrupt your network planning and/or trigger regulatory issues and penalties and damage claims.
3. Maintain Registry and Disclosure Compliance
Ensure your disclosure documents are updated annually and your details on the public register are accurate and current. That you are aware of any change to the Code or any other laws that impact your franchise operations (of which there has been quite a few in the last few years), and update agreements and systems to reflect this. Keep in mind that transparent, compliant record-keeping arguably helps build trust with existing and prospective franchisees and helps to ensure your onboarding and exiting process are seamless and legally sound.
Practical Tips for Franchisees
1. Tailor Your Due Diligence to the Entry Pathway
Never skip pre-entry due diligence. Get expert franchising legal advice on the different positives and negatives of each entry path and the terms that they are being offered to you. Furthermore, if buying an existing site, have your accountant verify the seller's books. If buying a greenfield site, stress-test the establishment costs. If buying a ceased site, have your lawyer and accountant scrutinise the mandatory Item site history disclosure to understand exactly why the previous business failed.
2. Track Your Renewal and Exit Windows
Do not wait for the franchisor to contact you. Know your agreement's expiry date and the exact timeframe required to notify the franchisor of your intent to renew or exit. Initiating these discussions 12 to 24 months in advance gives you the leverage to plan a smooth transition.
3. Understand Your Rights Regarding Goodwill and Restraints
From the outset of entering into the agreement then again before you reach the end of your term, seek expert advice on how your agreement handles unsold stock, equipment, and the goodwill you have built. Furthermore, review your post-term freedom to operate a similar business.
What's Next?
Whether you are looking to franchise your business concept, expand your existing operations or planning to buy, renew, or sell a franchise in Australia, getting the right advice from the start is key to avoiding conflict and protecting your commercial interests. Contact our experienced franchising legal team today to schedule a confidential consultation. Visit www.advpartners.com.au or email admin@advpartners.com.au.
Please note that this is a general and brief update; it does not purport to be comprehensive legal advice of all information and/or relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action with respect to this area.