Unpaid royalties, marketing fund contributions and supply agreement payments are a specific type of commercial receivable with their own legal and commercial complexities. A franchisee who stops paying fees is a debtor — but they are also a going concern operating under your brand, and the way you handle recovery affects the network as well as the specific account. Getting the balance right requires understanding both the legal framework and the commercial stakes.
Franchisor receivables overview
The amounts a franchisee typically owes a franchisor fall into several categories:
- Royalties — ongoing fees calculated as a percentage of gross sales or a fixed amount per period, payable under the franchise agreement.
- Marketing fund contributions — periodic contributions to a pooled marketing or advertising fund, governed by the franchise agreement and often subject to separate accounting obligations.
- Supply agreement payments — amounts owed for goods, services or licences supplied by the franchisor or a related entity to the franchisee under a supply arrangement.
- Other fees — training fees, renewal fees, technology platform fees and similar periodic charges specified in the agreement.
Each category may have different payment terms, different dispute mechanisms and different consequences for non-payment. Understanding which category you are dealing with is the starting point for recovery.
Royalties and marketing fund arrears
Unpaid royalties and marketing fund contributions are straightforward contractual debts, recoverable through the standard process: demand, negotiation, and if necessary legal proceedings. However, the Franchise Code of Conduct (the Code) — a mandatory industry code under the Competition and Consumer Act 2010 (Cth) — imposes obligations on both parties that affect the recovery process.
The Code requires franchisors to act in good faith in their dealings with franchisees, including in relation to enforcement of the franchise agreement. A franchisor who pursues recovery in a way that is oppressive, unreasonably withholds consent to a reasonable resolution, or applies unequal pressure may risk a Code breach claim from the franchisee — which can be used to offset or delay the recovery action.
The Franchise Code dispute process
Before commencing legal proceedings under a franchise agreement, the Code's dispute resolution provisions apply. The Code requires that franchisees be given an opportunity to resolve disputes through an internal process and — if unresolved — through mediation with an appropriate mediator (which may include the Office of the Franchising Mediation Adviser, now integrated within the Australian Small Business and Family Enterprise Ombudsman's (ASBFEO) office).
For straightforward fee arrears that are not genuinely in dispute, these requirements do not prevent a franchisor from sending a demand or pursuing recovery through a recovery agent. They become relevant when the franchisee disputes the amount, raises a counterclaim, or alleges a breach of the Code by the franchisor. In those cases, moving too quickly to legal proceedings without engaging the mediation step can expose the franchisor to a costs order or a Code breach finding.
Recovery without terminating the agreement
The default in commercial debt recovery — pursue the amount, and if unresolved, escalate — is complicated in a franchise context by the value of the ongoing franchise. Terminating a franchisee's agreement for non-payment of fees:
- Removes the ongoing royalty stream from that outlet.
- May require the franchisor to find and establish a replacement franchisee, at significant cost.
- Can affect network morale and the brand's perception in the relevant territory.
- Is subject to specific termination notice requirements in the Code and the franchise agreement.
For this reason, many franchisors pursue arrears through negotiation and structured payment arrangements before considering termination. A well-structured arrangement — fixed instalments, clear default clause, acknowledgement of the debt — can recover the arrears while keeping a productive franchisee in the system.
When termination is necessary
There are circumstances where termination is the right outcome — typically where the franchisee is fundamentally non-viable, the arrears are substantial and growing, and there is no realistic prospect of recovery or continued productive operation. The Franchise Code sets out specific requirements for termination, including:
- A minimum notice period (generally 28 days for a remediable breach), during which the franchisee may remedy the default.
- In some circumstances (serious breaches specified in the Code), immediate termination without a notice period.
- A prohibition on termination in certain circumstances without a genuine Code basis.
Termination does not extinguish the debt — the former franchisee remains liable for arrears accrued before termination and, depending on the franchise agreement, for loss of the franchisor's royalty stream for the balance of the term.
Protecting yourself going forward
The most effective protection against franchisee arrears is structural:
- Direct debit for all recurring fees — automatic deduction on a set date removes the debtor's control over the payment timing and makes arrears immediately visible.
- Reporting obligations — franchise agreements that require franchisees to report gross sales monthly give the franchisor both the data to calculate royalties and an early warning if sales are declining.
- Threshold monitoring — track royalty payments against expected sales. A franchisee whose royalties are below what their sales history suggests may be underreporting, not just falling behind.
- Regular financial disclosure requirements — requiring franchisees to provide periodic financial statements allows the franchisor to identify financial distress before it becomes arrears.
This guide is general information only. It does not constitute legal or financial advice. The Franchise Code of Conduct and franchise agreement terms vary — obtain qualified legal advice before taking any action under a franchise agreement.