Franchise Advice T
he question of deposits was raised at a recent British Franchise Association (bfa) forum, and it was surprising to see the number of
franchisors present who were not sure how they should be handling deposits. For some franchisors, a requirement for a prospective franchisee to pay a deposit forms part of their recruitment process. For others, especially the less experienced franchisors, there can be concern about when to ask for a deposit from a potential franchisee and on what basis it should be held. Equally, a prospective franchisee should be aware of what represents good practice in relation to paying a deposit. In particular, it is useful to understand the basis on which any deposit will be held by the franchisor and, most importantly, on what terms it will be returned if the decision is taken by the investor to proceed no further with the franchise opportunity. The bfa occasionally issue technical bulletins, and it has done so in the case of refunding deposits. The most recent relevant technical bulletin was issued in 2013 and confi rms that the bfa has historically required its members to refund deposits taken from prospective franchisees if they do not proceed with the opportunity. It is acceptable for a franchisor to deduct directly related and verifi able expenses from the deposit but the key point is that the deposit should be, in part, refundable. The bulletin served as a reminder that not all franchisor members are aware of the bfa guidelines on this topic. While standards have been in place for some time, it is helpful for both franchisors and prospective franchisees to be reminded about what constitutes good practice in this area. It is a requirement of the bfa that
details of any pre-contract deposit must be given in writing to prospective franchisees, including details of what costs will be deducted from the deposit and under what circumstances. Pre- contract deposits must be refunded to prospective franchisees who withdraw their franchise application, regardless of reason, less any direct costs that have been previously notifi ed to the prospective franchisees. A pre-contract deposit must be off set against the initial fee for the prospective franchisee joining the network. For example, if the initial licence fee is £15,000 and the deposit £5,000, the balance payable on signing the franchise agreement should be £10,000. The bfa has confi rmed that costs which can be legitimately deducted from any refund include, but are not necessarily limited to, solicitor’s fees, accountant’s costs, travel costs, food and accommodation, and any third-party research paid for by the franchisor for work such as territory mapping for the prospective franchisee. It is not legitimate, however, to deduct the franchisor’s own internal costs, such as staff and management costs, incurred in dealing with the application, or the opportunity cost of a lost sale to another interested applicant for the same territory.
It is bad practice for a franchisor to take a deposit which is not refundable in part, or which becomes non-refundable in the event that the prospective franchisee takes too long to carry out their evaluation of the opportunity and/ or to complete their due diligence. It is common for the deposit
agreement to include other contractual provisions. These may include: • The reservation of a specifi c territory for a period of time to allow the prospective franchisee to investigate the opportunity
• An obligation to keep information disclosed by the franchisor confi dential and for the purpose of franchise evaluation only
• Restrictive covenant preventing the prospective franchisee from deciding not to proceed with the franchisor’s business with the intention of setting themselves up in competition
When paying a deposit, remember to: • Confi rm that all the terms regards deposits discussed with the franchisor are in writing
• Make sure the amount to be retained by the franchisor if you decide not to proceed is clear and unambiguous
• Check the deposit will be off set against the initial fee if you proceed to signing the franchise agreement
• Make sure you understand what additional obligations – such as confi dentiality and any restrictions on your future activities – you are committing to in signing the deposit agreement
For a franchisor there are benefi ts too in taking a deposit, as it focuses the prospective franchisee’s mind on the business proposition and enables the franchisor to carry out works such as mapping of territory. It also provides a framework for the timescale in which the franchisor can expect a prospective franchisee to make a decision about whether or not to proceed with a franchise agreement, and ensures that information is kept confi dential. Provided that care is taken to
ensure that the deposit is reasonable and held in accordance with good practice, paying a deposit is a positive step forward on your franchise agreement pathway.
About the author Jane Masih is head of franchising,
Owen White Solicitors
April 2017 |
BusinessFranchise.com | 35
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