Franchise Business Deposits: Why They're Necessary

Deposits are the reality check of a new franchisee's dream; they can make or break a potentially lucrative franchise deal. That's because each franchiser has different deposit requirements. Some companies require a large amount of cash down, while others ask for a smaller initial down payment that, for many new franchisees, may be more affordable.

Although there is no set standard for deposits, they typically total a certain percentage of the franchise fee. Here are some important facts that you'll need to know concerning franchisee deposits:

Your deposit may or may not be refundable. If you change your mind and decide not to purchase a franchise after all, you may not get your deposit back; it depends upon the franchiser. Some companies issue complete refunds, while others retain the entire deposit to help offset the legal and administrative costs of the process, even if the deal isn't finalized in the end. Likewise, some franchisers refund a part of the deposit, keeping only a portion to offset administrative fees. Before making a deposit, make sure that you find out whether or not any of it is refundable if the deal doesn't go through.

A deposit may give you the right to reserve a territory for your franchise. Many franchisers look upon the deposit as an opportunity for franchisees to put a hold on their desired territories until the franchise deal is finalized. This means that, while you and your lawyers are reviewing documents and going through the entire due diligence process, the franchiser will make sure that no one else gets the territory that you requested.

Your deposit means that you're serious about the transaction. Franchisers look upon deposits as act of good faith that you're serious about becoming a franchisee, not just making casual inquiries. This differentiation is necessary because a successful franchiser may get hundreds of responses every month and responses that require a great deal of administrative time to process. Once you've made your deposit, the franchiser will begin to look upon you as a serious franchisee candidate and will start giving you the personalized attention that you'll need in order to help you make your decision.

Depending upon the province where you live, there are laws governing the time frame of a franchise deposit. For example, prospective franchisees in Ontario are allotted a period of 14 days to review the franchiser's disclosure document before being required to make a deposit payment. Likewise, Alberta franchisers can collect a deposit earlier than that but are allowed to ask for no more than 20 percent of the franchise fee. Additionally, the deposit must be completely refundable if the deal doesn't go through.

You can research online to find out if your province has any specific laws concerning franchise deposits. If you have any questions concerning your deposit, it's important to talk to your franchiser first before making your payment or signing anything.