In Short
- A successful franchise model does not guarantee your franchise will be profitable. Local conditions, competition, management capability and economic factors all influence outcomes.
- Income guarantees can be misleading. They may not cover operating costs, often include strict conditions, and payments may be delayed.
- From 1 November 2025, franchisors must provide franchisees with a reasonable opportunity to recover their investment, but this does not guarantee returns or give franchisees automatic compensation.
Tips for Businesses
Before investing in a franchise, assess the business model in the context of your location, expenses and expected cash flow. Treat income guarantees with caution and understand all preconditions. Review the franchise agreement carefully, seek professional advice, and stress-test whether the proposed term provides sufficient time to recoup your total investment.
There is no guarantee of a return on investment in the business world, and any suggestion otherwise should be treated with caution. A franchise business will not generate money on its own – as a general rule, you will only get out of the franchise business what you put into it.
Common misconceptions include the belief that a proven business model guarantees success or that income guarantee clauses ensure profitability. These assumptions can lead prospective franchisees to underestimate the risks and challenges of franchise ownership.
This article will examine what can realistically be expected of franchisees, clarify the true nature of income guarantees, and explain the new reasonable opportunity framework introduced under the Franchising Code of Conduct from 1 November 2025. Understanding these key concepts will help you make an informed decision about whether franchising is the right investment for you.
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Proven Business Model
Investing in a franchise with a successful track record indeed gives a prospective franchisee confidence that the business model works. There is no guarantee, however, that such success will flow through to your franchise business. Multiple factors can impact a franchisee’s success. Replicating a successful franchise in a different context can produce very different results. These factors include:
- Location: Affects your franchise’s success by influencing foot traffic, accessibility, and customer visibility.
- Proximity and size of competitors: Nearby competitors and their market share can directly affect your revenue.
- Changes to laws regarding relevant products and services: Regulatory changes can affect your ability to operate. They may also restrict certain products or services.
- Economic conditions and seasonal factors: Broader economic trends, local economic health, and seasonal demand fluctuations can all affect profitability.
- Effectiveness of online and offline marketing: Your marketing execution affects customer acquisition. Local advertising competitiveness also influences results.
- Brand awareness and reputation: The franchise brand’s strength in your market may differ significantly from other locations.
Demographics: The age, income, lifestyle, and cultural makeup of your local customers must align with the franchise’s target market. Additionally, it is important to recognise that a successful franchise may reflect exceptional franchisee management, not only the business model. Strong management skills and dedication are critical – even the best franchise model requires capable execution to succeed.
Income Guarantee Clause
Some franchise agreements have an income guarantee clause. An income guarantee clause ensures a franchisee earns a minimum income over a set period. This usually applies in the first year of trading. Such a valuable right provides franchisees with the security to forecast their income, particularly in the early stages.
However, income guarantee clauses can also be quite misleading for several reasons. First, they might obscure a franchisee’s true cash flow needs. A franchisee may be guaranteed an income that is insufficient to cover the franchise’s expenses. This issue often becomes apparent only after you begin operating the franchise. At that point, it may be too late to renegotiate the income guarantee.
Second, income guarantees often come with significant preconditions that franchisees must meet in order to qualify for payment. These pre-conditions can include:
- Accepting a minimum number of leads or spending a minimum amount on marketing: You may need to invest in advertising. You may also need to accept all leads, regardless of quality.
- Conducting specified outreach activities: The franchisor may require you to perform specific promotional or customer-acquisition activities.
- Not being in breach and complying with operational standards: Any breach, even minor, could disqualify you from the income guarantee.
- Meeting other operating standards: Additional requirements may include minimum opening hours, staffing levels, or participation in franchisor initiatives.
Additionally, there can be significant delays in receiving reimbursement under an income guarantee. Even if you qualify, the payment structure may not meet your immediate cash-flow needs. This mismatch could place you in financial difficulty.
Continue reading this article below the formReasonable Opportunity for Return on Investment
From 1 November 2025, the Franchising Code of Conduct introduces new protections under section 44. This applies to franchise agreements entered into, renewed, or transferred from that date. The provision requires franchisors to ensure franchisees have a “reasonable opportunity” to achieve a return on their investment. This provision marks a significant shift in the franchisor-franchisee relationship. It imposes a positive obligation on franchisors rather than simply prohibiting misconduct.
At its core, the requirement obliges franchisors to ensure the initial term is commercially viable. It must give franchisees a realistic chance to break even or earn a profit. The “investment” that franchisees must have a reasonable opportunity to recoup includes all entry costs. These include franchise fees, fitout, lease costs, stock, and wages or contractor expenses. For existing franchise businesses being purchased, the investment also includes the purchase price.
However, there are practical limitations that can affect a franchisor’s ability to provide a sufficiently long term. For example, a landlord may refuse to grant a lease long enough to meet the requirement. A lender may also limit the franchise term. Additionally, complications can arise when a franchise is transferred mid-term. If someone buys a franchise with only two years left on the lease, they may not have a reasonable opportunity to profit. These practical scenarios highlight the complexity of applying Section 44 in real-world situations.
Impact on Franchisors and Franchisees
While this may seem like common sense – after all, failing to provide such an opportunity could already give rise to claims of bad faith, misleading and deceptive conduct, or unconscionable conduct – the explicit requirement creates an increased risk of litigation and disputes, with franchisors potentially facing multiple penalties for breaching the Code for each franchise agreement entered into. This creates a stronger incentive for franchisors to avoid churning franchisees through unsustainable business ventures.
The practical impact is that franchisors need to be far more diligent in their business planning and record-keeping. They should maintain comprehensive business records, financial modelling, network-wide historical profit-and-loss statements, and accounting advice to demonstrate that their franchise model was, and remains, commercially viable. This obligation also gives franchisors grounds to refuse a franchise transfer if the proposed purchase price is so high that the incoming franchisee would not have a reasonable opportunity to achieve a return on their investment, as approving such a transfer could breach the franchisor’s obligations under section 44. This evidence will be crucial if a franchisor needs to prove they have fulfilled their obligations under the Code.
For prospective franchisees, this new provision provides important statutory protection. However, it is important to understand that a breach of section 44 does not give franchisees direct recourse – it will not invalidate the franchise agreement, nor will franchisees automatically receive damages for a breach of the Code, as penalties for breaches are paid to the ACCC rather than to affected franchisees. Rather, it ensures the franchisor has structured the agreement to provide a genuine opportunity for return on investment, assuming the franchisee operates the business competently.
However, success can still be affected by external factors beyond anyone’s control, such as changes in market conditions or broader economic downturns, in which neither the franchisor nor the franchisee is at fault. Franchisees should continue to conduct thorough due diligence, seek professional advice, and maintain realistic expectations regarding their potential returns.
Key Takeaways
If you are considering purchasing a franchise, any suggestion that the franchise is guaranteed to provide positive returns is misleading, as such verbal assurances have little legal standing and are difficult to enforce against the franchisor.
If you need further assistance with franchise purchases, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page
Frequently Asked Questions
No. Even a successful franchise model cannot guarantee the same results in a different context. Factors such as location, competition, regulatory changes, economic conditions, marketing effectiveness, brand reputation and local demographics all influence profitability. Strong franchisee management and dedication also play a major role in outcomes.
Not necessarily. Income guarantees may mask your true cash-flow needs and might not cover operating expenses. They often come with strict preconditions, such as marketing spend or compliance requirements, and payments can be delayed. Franchisees must review the agreement carefully and understand exactly what is required to qualify.
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