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eposits are often collected by franchisors prior
to entering into a full franchise agreement.
They are typically a percentage of the initial
franchise fee or the full initial franchise fee
amount. When entering into a franchise agreement, the
deposit is credited towards the amounts owing. Should
the potential franchisee choose not to move forward with
the agreement, the deposit may or may not be refunded.
There is usually a Deposit Agreement that is entered into
at the same time the deposit is made. This agreement
defines how and if the deposit will be returned, provides
timelines, and typically addresses the issue of confiden-
tiality. Deposits are paid prior to entering into a fran-
chise agreement.
The main purpose of the deposit, from the franchisor
perspective, is to differentiate the serious candidates from
casual enquiries to the franchise opportunity. Franchi-
sors often deal with hundreds of enquiries every month,
and simply cannot begin to work at finding locations
or assist with bank financing with everyone. A deposit
allows franchisors to properly allocate its resources and
ensure that there is some compensation in the event that
the prospective franchisee does not move forward. The
franchisor is also concerned with confidentiality. The
deposit agreement will often have clauses stating that the
provided proprietary information will be kept confidential
and that appropriate materials will be returned.
From a potential franchisee perspective, deposits will
often permit one to put a territory on hold so that the
potential franchisee can do their due diligence, arrange
financing, have documents reviewed by a lawyer, or find
an approved location.
By paying a deposit, potential franchisees demon-
strate their seriousness in the franchise opportunity and
are ensuring that resources are being prudently spent.
The franchisor will normally work with potential fran-
chisees to remove conditions on the deposit agreement
while reserving the desired territory for a limited period
of time.
Deposits can be refundable, partially refundable or
non-refundable, depending upon the circumstances and
primarily how much time the franchisor spends working
with the potential franchisee. The franchisor wants to
be compensated for its efforts in, for example, reviewing
locations or assisting potential franchisees with their
business plan. Franchisors should provide deposit agree-
ments that clarify how and if the deposit is refunded. If
the franchisor does not provide a deposit agreement,potential franchisees should have one created to avoid
dependency on verbal discussions. It is important that
deposit agreements are read carefully and are reviewed
by a lawyer so that there is clarity as to the terms and
conditions.
Provincial legislation has put in place certain laws
to protect the public regarding franchise deposits. In
Ontario, franchisors cannot require potential franchi-
sees to pay a deposit or sign a deposit agreement until
the potential franchisee has had 14 days to review the
Disclosure Document. In Alberta, the franchisor can col-
lect a deposit prior to the review of the disclosure and
entering a franchise agreement but such deposits must
be refundable and can only be for a maximum of 20 per
cent of the initial franchise fee. The deposit agreement
must also be limited to the issues of confidentiality, loca-
tion and non-use of the franchisor’s information.
Deposits are a great way for potential franchisees to
show that they are serious about the franchise opportu-
nity, and provide some initial compensation to the fran-
chisor for preliminary work and to reserve a territory for
potential franchisees. The deposit agreement protects
the interests of both the potential franchisee and the
franchisor.FRANCHISE TUTORIAL
Tutorial
3
THE FUNDAMENTALS OF FRANCHISING
Intro to Deposits