Let’s recap. In Intro to Franchise Fee Fundamentals we briefly mentioned that before a franchisee enters a franchise agreement, two types of fees are required:
- An initial fee
- A royalty fee
But prior to entering some franchise agreements, there’s often a third fee – a deposit. A deposit (typically a small percentage of the initial fee, so you’re not paying extra) is a payment made by the franchisee to the franchisor at the earliest stage of recruitment. It’s used to protect the interests of both the franchisor and franchisee.
Purpose of the Deposit
From the franchisor perspective –
- Differentiates serious candidates from casual inquiries
- Provides franchisors initial compensation for preliminary efforts (i.e. reviewing locations or assisting potential franchisees with their business plan)
- Provides franchisors some compensation in the event the franchisee doesn’t move forward
From the franchisee perspective –
- Demonstrates that they are serious to potential franchisors
- Allows the franchisee to put their franchise location on hold
- Ensures that their money is prudently spent
Before submitting (as a franchisee) or accepting (as a franchisor) a deposit, there should be a Deposit Agreement in place, outlining the terms of the deposit including how, when and if it’s refundable, in addition to addressing any issues of confidentiality.
In the case that a franchisor does not provide a Deposit Agreement, a potential franchisee should create one. To avoid any discrepancies, this agreement should be read carefully by all parties involved and reviewed by a lawyer.
Provincial legislation has put in place certain laws around franchise deposits to protect the public. However, the laws vary according to the region.
For example in Ontario, franchisors cannot require potential franchisees to pay a deposit or sign a deposit agreement until the potential franchisee has had 14 days to review the Disclosure Document. While in Alberta, the franchisor can collect a deposit prior to the review of the disclosure, but the deposit must be refundable and can only be for a maximum of 20 percent of the initial fee.
Ensure that you stay up to date on the legal requirements before you make a deposit.
The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/or entities other than the CFA, the said other persons and/or entities are solely responsible for their content. The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.