One of the most significant changes introduced by the new Franchising Code of Conduct is the requirement for franchise agreements to include compensation provisions for early termination. This obligation, which took effect on 1 November 2025, applies to all franchise agreements entered into, transferred, renewed, or extended from that date.
Previously, early termination compensation requirements applied only to new vehicle dealership agreements. The new Code extends this protection to all franchise agreements. Under section 43 of the Code, a franchisor must not enter into a franchise agreement unless it provides for the franchisee to be compensated if the agreement is terminated before it expires because the franchisor withdraws from the Australian market, rationalises its networks in Australia, or changes its distribution models in Australia.
The agreement must specify how compensation is to be determined, with reference to four key factors:
- lost profit from direct and indirect revenue;
- unamortised capital expenditure requested by the franchisor;
- loss of opportunity in selling established goodwill; and
- costs of winding up the franchised business.
In practice, this means franchisors need to include a formula or set of valuation principles, and should consider including a cap on compensation, provided that cap is determined in good faith and considers the lost benefit the franchisee will suffer.
There is also a buy-back obligation. Franchise agreements must require the franchisor to buy back or compensate the franchisee for outstanding stock that was specified by the franchisor and required to operate the franchise, as well as essential specialty equipment and branded products that cannot be repurposed for a similar business. For example, branded packaging unique to the franchise system would need to be bought back, but generic equipment such as refrigerators would not.
It is worth noting that the Code does not prohibit franchisors from including terms that allow early termination without franchisee breach. However, franchisors must not enter into agreements that purport to exclude any compensation to which the franchisee may otherwise be entitled if the agreement is terminated early other than for franchisee breach.
Practical Takeaways
- Franchisors must act now. All franchise agreements entered into from 1 November 2025 must include early termination compensation provisions. Review and update your template agreements accordingly.
- Build in clear methodology. The agreement should set out a transparent formula or valuation principles for calculating compensation, referencing the four statutory factors. Ambiguity will only invite disputes.
- Franchisees should understand their rights. If your franchise agreement was entered into, renewed, or extended from 1 November 2025, you are entitled to compensation in the specified early termination scenarios. Know what your agreement says before issues arise.
The new early termination compensation requirements represent a significant change to the franchising landscape, and getting your agreements right from the outset is essential. Whether you are a franchisor needing to update your template agreements to reflect the new obligations, or a franchisee wanting to understand your entitlements under an existing or forthcoming agreement, contact the Franchising Team at Hitch for tailored advice.