Choosing an Initial Franchise Term in Australia

Choosing how long your first franchise agreements will last is a business-design decision, not simply a blank for your lawyer to fill in. Before franchising an existing Australian business, you need to understand whether the proposed initial term gives franchisees a realistic operating horizon. A familiar contract length borrowed from another brand may not suit your investment requirements, customer demand or trading model.

Understand the legal requirement

Australia’s franchising community operates under the Franchising Code of Conduct, a mandatory code prescribed under the Competition and Consumer Act 2010. The Code regulates franchise relationships, including agreement terms and disclosure obligations. The Australian Consumer Law also prohibits misleading or deceptive conduct.

For franchise agreements entered into, renewed or extended on or after 1 November 2025, the Code requires a reasonable opportunity for the franchisee to make a return, during the agreement’s term, on investment required by the franchisor.

This is not a guarantee that every franchisee will earn a profit. It does mean that the initial term cannot sensibly be chosen in isolation from the investment your model demands. Nor should you assume a possible future renewal fixes an inadequate initial operating period.

Ask a specialist franchise lawyer how the requirement applies to your proposed agreement. Have an accountant assess the commercial assumptions supporting your chosen term. A contractual statement alone is not a substitute for a workable business model.

Map the investment against the trading timeline

Start with a schedule of the investment you require a franchisee to make. Depending on the business, this might include an initial franchise fee, fit-out, equipment, technology and opening stock. Identify which amounts are compulsory and when they must be paid.

For commercial planning, also map other funding needs, such as working capital and deposits. Ask your advisers which amounts fall within the legal requirement rather than assuming every cash outflow has the same treatment.

Next, build a timeline showing:

• When the franchise agreement starts and expires.
• When initial expenditure occurs.
• How long premises preparation, training and approvals may take.
• When the franchisee can realistically begin trading.
• How long customer demand may take to settle into a regular pattern.

The distinction between signing and opening matters. If the contractual clock starts before the business can trade, the franchisee may have less revenue-producing time than the headline term suggests.

Use records from your existing business to inform these assumptions, but identify advantages a new franchisee may not share, such as an established customer base or unusually favourable rent.

Test the term under realistic conditions

Ask your accountant to model the proposed initial term using the franchisee’s expected costs, not just your company-owned outlet’s accounts. Include franchise fees, required purchases, staffing, occupancy costs and an appropriate allowance for the owner’s work.

Examine both an evidence-based central case and plausible downside scenarios. For example, consider slower customer acquisition, an opening delay or higher operating costs. These are planning scenarios, not predictions or statutory tests.

Keep three questions separate:

• Can the business meet its ongoing bills?
• Can it support appropriate remuneration for the franchisee’s work?
• Does the term provide a reasonable opportunity to make a return on the required investment?

Positive monthly cash flow does not, by itself, answer all three. Equally, reaching a simple payback date is not automatically proof of legal compliance.

If the proposal works only with exceptionally strong sales from the first month, revisit the term or the business model. Options may include reducing mandatory start-up expenditure or removing avoidable delays before opening.

Align the agreement with the operating reality

Once you have a defensible commercial proposal, give your lawyer a clear brief. Specify the intended commencement date, how the expiry date is calculated and what should happen if opening is delayed. Do not leave these matters to informal assurances.

Check that related arrangements support the same operating horizon. Premises access, essential equipment arrangements and permissions to use necessary systems should not unexpectedly expire before the franchisee’s trading rights.

Make sure the agreement, disclosure document and explanations given to prospective franchisees describe the term consistently. Avoid presenting renewal, resale proceeds or asset values as certain outcomes when they are not.

Retain a dated record of your assumptions and obtain fresh advice if required investment or opening conditions materially change before offering further franchises.

Practical takeaway: Choose the initial term only after mapping required investment, usable trading time and realistic franchisee economics. Then have your accountant and franchise lawyer check that the commercial model and contract support each other.