Due diligence in site selection and territory allocation in the franchise sector has now become even more important than ever before with the latest changes to the Australian Franchising Code of Conduct that came into effect from 1 April 2025.
As part of the changes to the Franchising Code of Conduct, one change that has sparked the most discussion and speculation, is that franchise agreements must provide “reasonable opportunity” for a return on a franchisee’s investment (ROI)*. That is, “a franchisor must not enter into a franchise agreement unless the agreement provides the franchisee with a reasonable opportunity to make a return, during the term of the agreement, on any investment required by the franchisor as part of entering into, or under, the agreement”.
While this appears ambiguous, or even unclear, on how this is going to be measured and monitored moving forward, one thing that is clear is that it places even greater accountability on the franchisor to ensure that they have set up their franchisees for success.
What does this change mean for franchisors?
Due diligence becomes more critical
Franchisors must demonstrate they have undertaken due diligence in that there will be a reasonable opportunity for ROI when entering into franchise agreements with franchisees. Many factors can impact on this, therefore franchisors will need to ensure that any initial assumptions on ensuring reasonable opportunity for ROI are documented upfront.
How ROI is going to be measured will need to be determined upfront
Franchisors will need to determine how they are going to measure “reasonable opportunity for ROI” upfront, so that there are no disputes down the track if franchisees are not performing as expected. This area has sparked discussion on what is considered to be “reasonable” and how this may vary dependant on how each franchisee operates. For example, is the franchisee expected to work in the business? Are they expected to work a certain number of hours per week to ensure the best chance of ROI? What is considered a reasonable opportunity for ROI? After how long is “reasonable opportunity for ROI” expected? These are just some examples of questions that will need to be determined upfront.
Agreements must be fairly structured and detailed
To ensure the greatest chance of franchisee success, franchise agreements now more than ever before will need to be transparent, fairly structured, and detailed to ensure franchisees have the greatest chance of success and reasonable opportunity for ROI. If structured and executed fairly and correctly it will create a ‘win-win’ for both franchisor and franchisee, because at the end of the day it is in the best interests of both parties for franchisees to succeed.
Focus on risk transparency
By defining the circumstances under which reasonable opportunity for ROI is expected, franchisors help set more transparent expectations, reducing the risk of future disputes, protecting the reputation of the brand, and creating a ‘win-win’ scenario for all.
What this change does not mean
While this change is intended to ensure that all franchisees have the highest chance of success, and reasonable opportunity for ROI, there will be situations and external factors that can impact on this.
No guarantee of profitability
While the new Franchising Code of Conduct does require that franchise agreements allow for franchisees to have a reasonable opportunity to make a ROI, it does not mean that franchisors need to guarantee profitability. Many factors can impact on profitability, which will be greatly impacted by the different decisions franchisees make on running their franchise.
No excuse for less than ideal performance
Another question that has sparked debate due to the changes, is what happens if a franchisee is not performing well due to their own mismanagement, lack of input, market shifts or personal factors. As long as the franchise agreement has outlined, disclosed, and provided a reasonable opportunity for ROI, and the franchisor has taken reasonable steps to offer a viable model, if the franchisee is not performing as expected or according to the franchisors requirements outlined in the franchise agreement, then the onus is not likely to be on the franchisor for poor franchisee performance in this scenario.
How Geotech is helping franchises assess ROI
The franchise industry has always placed a strong emphasis on demonstrating due diligence on site selection and territory allocation, and now this has become even more important than ever before with the changes to the Franchising Code of Conduct.
For site selection, many franchisors are using sales prediction modelling and sales forecasts to determine the top line revenue that a site would be expected to achieve, which often include inputs based on residential demographics, levels of surrounding competition, and site specific factors. This can then be used as a critical input into determining what the expected performance, and therefore ROI (once other factors are considered) should be for a site. This is critical for showing due diligence upfront, and potentially mitigating risk down the track if a franchise is not performing as expected.
For territory allocation, many franchisors are undertaking a process of analysing territories and determining what makes a viable and equitable territory and carving up any new territories based on the specific criteria found to constitute a viable and equitable territory. This gives territory-based franchisees comfort that they have their own “patch” and that they have been provided with a territory that is equitable and viable, ensuring that they have the highest chance of success and reasonable opportunity for ROI.
At Geotech, we specialise in sales prediction modelling, territory analysis, and strategic network planning, providing due diligence in site selection and territory planning for franchise systems. This is now even more important than ever before and can be used as an important input in helping franchise systems determine reasonable opportunity for ROI for new sites and territories.
The 2025 updates to the Franchising Code of Conduct reflect a broader shift toward accountability and transparency in franchise relationships. While franchisors are not expected to eliminate business risk or guarantee success, they must now show that they have undertaken due diligence and created a structure in which franchisees have a fair and reasonable opportunity for ROI.
Franchise systems that embrace these changes — by adopting more transparent, data-driven practices — will not only comply with the new Code, but will foster stronger, more sustainable franchise networks built on trust and mutual success.
To learn more about how sales predictions may help you, visit our website.
*This is currently under a grace period until 1 November 2025.
