Breaking Down Deposits for Future Franchisee

May 23, 2017 | General

When newcomers approach franchising for the first time, franchise deposits are common causes for concern. Because self-starting doesn’t impose these up-front fees on the entrepreneur, some people think it’s a more attractive option, but that’s not necessarily true! In today’s post, we tell prospective franchisees the truth about franchise deposits. Read on to learn why they exist, how they benefit you, and whether your franchisor is asking for a reasonable amount.

Introduction to Franchisee Deposits

New franchisees are typically required to make deposits before entering into a full franchise agreement, which can be off-putting for newcomers to this business model. But, as is often the case, franchisee discomfort dissolves once we remove the fear of the unknown. It is our hope that this introduction to franchisee deposits will help dispel any unfounded fears and give you a greater understanding of the nature of franchising in Canada. Franchisee deposits are typically calculated as a percentage of the initial franchise fee, so you’re not actually paying anything extra. Whatever amount is required up front will be credited towards the total amounts owing. Beware: if you choose not to move forward with your chosen franchise, you are not necessarily guaranteed to have that deposit returned to you. Franchisees will usually be provided with a Deposit Agreement that will stipulate the exact conditions of their payment, rights to a refund, and confidentiality details. Refund eligibility will often depend on how much time, energy, and money the franchisor has already committed to your startup.

Why Do Franchisees Pay Deposits?

From the franchisor’s perspective, mandating deposits is one of the best ways to determine which prospects are serious about their inquiries. Franchisors have to sift through hundreds of requests for information packages and consultations every month, and deposits are one of the best ways to weed out wishy-washy prospects. Beyond that, the deposit also acts as a security measure to protect franchisor confidentiality. Imagine that a rival business wanted access to the inner workings of their competitor’s business – what better way than to pose as an interested franchisee and request sensitive business documents? By mandating a deposit, the franchisor ensures that their system secrets are protected. Finally, the deposit also gives the franchisor capital that they need to put territories on hold while the franchisee puts their finances in order and reviews the franchise agreement.

Reviewing Pertinent Provincial Legislation

In Ontario, franchisors do not have the right to impose a deposit on franchisees until they have been given at least 14 days to review the franchise disclosure document. Similarly, franchisors cannot force franchisees to sign a Deposit Agreement within this window. In Alberta, this is not the case; franchisors have the right to collect their deposits prior to the franchisee’s review of the FDD. However, certain protections for franchisees do exist. In particular, the franchisor’s deposit must be fully refundable, and cannot be calculated at more than 20% of the initial franchise fee. Additionally, the deposit agreement itself must be limited to matters of location and confidentiality.

Franchisees: Learn More About Deposits

If you have additional questions about your deposits or any other aspect of owning your own franchise in Canada, please visit http://www.frannet.ca to book a free consultation with a member of our team. Our experienced franchise advisers dispense free information every single day and will be happy to help you make the best decision for your future.