Common Mistakes in Franchise Agreements (How to Avoid Them)
Franchising can be a powerful way to scale a business or step into entrepreneurship with a proven model. But whether you are a franchisor or franchisee, the legal agreement underpinning the relationship is critical and often misunderstood.
At Aditum Lawyers, we regularly advise both sides of the franchise relationship. We have seen successful networks thrive under clear and balanced agreements, and we have also seen franchisees lose life savings, or franchisors face class actions, because of poorly drafted or poorly understood documents.
Franchise agreements are not just templates. They are complex commercial contracts, regulated under the Franchising Code of Conduct, and they have long-term legal and financial consequences.
The Role of the Franchise Agreement
The franchise agreement is the legally binding contract between the franchisor (the brand owner) and the franchisee (the operator). It sets out the rights and responsibilities of each party, the duration and renewal terms, financial obligations, intellectual property use, operating procedures, territory rights, dispute resolution, and termination clauses.
It is enforceable in court and regulated under the Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth), which includes the Franchising Code of Conduct, a mandatory industry code under the Competition and Consumer Act 2010.
A franchising arrangement that fails to comply with the Code can result in serious penalties, compensation claims, and reputational damage.
Recent Changes to the Franchising Code
As of 1 July 2021, significant amendments to the Code came into effect. Key changes include:
- Stronger disclosure obligations for franchisors, including providing a Key Facts Sheet and an Information Statement to prospective franchisees.
- Increased cooling-off period of 14 days, and the ability for franchisees to terminate within 14 days after receiving the agreement, disclosure documents, or lease (whichever is later).
- Stronger rights to terminate for franchisees in certain circumstances, including early termination rights for new franchisees within the first 14 days.
- Dispute resolution updates, including expanded access to conciliation and arbitration and the ability for franchisees to collectively bargain.
- Civil penalties for breaches, with significant increases in maximum fines.
- Capital expenditure limits, requiring franchisors to provide justification for major expenditures.
These changes dramatically shift the balance of power and accountability—especially for franchisors who fail to stay compliant.
Common Mistakes We See (and How to Avoid Them)
- Failing to Customise the Agreement
Mistake: Using a generic or outdated franchise agreement across all locations or industries.
Impact: The agreement may not reflect specific business needs, local regulatory issues, or risk allocations. Courts may also interpret vague clauses against the party who drafted them.
Solution: Every franchise agreement should be tailored to the specific franchise model, jurisdiction, industry, and commercial goals. For example, a food franchise with leased premises carries different risks than a mobile services franchise.
- Vague or One-Sided Termination Clauses
Mistake: Franchisors often include broad termination rights, while franchisees are given little or no exit flexibility.
Impact: Courts may view this as unfair under the Australian Consumer Law. Franchisees may be stuck in an unprofitable business, and franchisors risk reputational damage or litigation.
Solution: Termination clauses should be clear, balanced, and compliant with the Code. For example, outline the steps for breach notices, cure periods, and dispute resolution. Allow early termination with clear financial consequences.
- Poor Disclosure by Franchisors
Mistake: Incomplete or outdated Disclosure Documents, or failure to provide them in the required timeframe.
Impact: This is a direct breach of the Code and can lead to financial penalties, cancellation of agreements, or franchisee claims.
Solution: Franchisors must provide the Key Facts Sheet, Disclosure Document, and Franchise Agreement at least 14 days before signing. These must be updated annually within four months of the end of the financial year.
- Underestimating the True Cost for Franchisees
Mistake: The agreement fails to provide a complete breakdown of costs, including setup, marketing, software, training, and ongoing royalties.
Impact: Franchisees may enter the business undercapitalised, leading to early failure and potential legal disputes.
Solution: Franchisors should fully disclose capital expenditure and justify any compulsory investments. Franchisees should engage a lawyer and accountant to model cash flow and risk before signing.
- Inadequate Territory Protection
Mistake: Ambiguity around exclusive or non-exclusive territories, or no restriction on online sales.
Impact: Franchisees may find themselves competing against other franchisees or even the franchisor in the same area.
Solution: Clearly define geographic territories, online rights, and expansion policies. Make sure franchisees understand how territory overlaps, relocations or site approvals are handled.
- Lack of Dispute Resolution Planning
Mistake: Agreements that refer only to litigation or don’t include meaningful dispute mechanisms.
Impact: Small disputes escalate into full-blown legal proceedings, damaging relationships and finances.
Solution: Include a clear, step-by-step dispute resolution clause in compliance with the Code. This should cover good-faith negotiation, mediation, and access to conciliation or arbitration.
- Ignoring Restraint of Trade and IP Protections
Mistake: Franchisors fail to include effective restraints of trade or IP enforcement clauses. Franchisees don’t realise they’re bound by them long after termination.
Impact: Ex-franchisees may start a competing business using confidential information, or a franchisor may overreach with an unenforceable restraint.
Solution: Draft enforceable restraint clauses that are reasonable in scope, duration and geography. Ensure IP licences are clear and tied to performance and compliance.
Advice for Franchisors
- Review your agreements annually to stay aligned with Code changes and commercial reality.
- Be transparent about costs, obligations, and limitations to avoid disputes and penalties.
- Invest in strong disclosure and training processes—this is not just legal compliance, it’s brand protection.
- Treat your franchisees as long-term business partners, not just customers.
Advice for Franchisees
- Never sign a franchise agreement without independent legal and accounting advice.
- Understand the total cost of ownership, not just the initial buy-in.
- Ask detailed questions about territory, training, marketing support, and dispute processes.
- Walk away if the franchisor is evasive, defensive, or overly aggressive in negotiations.
We often advise franchisees who feel pressured to sign quickly or rely on verbal assurances from franchisors. These verbal promises are meaningless if they are not in the agreement.
Final Word
Franchising offers real opportunities—but only when the legal structure is sound.
For franchisors, a well-drafted agreement protects your brand, your IP and your growth. For franchisees, it protects your investment, your rights and your ability to earn a return.
Don’t treat the franchise agreement as a formality. Treat it as a business-critical tool—and get expert advice before you sign.
Need help with a franchise agreement, whether you’re starting a network or joining one?
Contact Aditum Lawyers today. We act for both franchisors and franchisees across Australia, providing strategic, plain-English advice that protects your position and sets the relationship up for success.
