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Owen White Solicitors


Jane Masih is head of fra nchising at Owen White Solicitors. Here, she discusses the pros and cons of fra nchise deposits and what you should be aware of


I remember one time when the question of deposits was raised at a 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 issues technical bulletins, and it has done so in the case of refunding deposits. The most recent relevant technical bulletin 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. It is a requirement of the bfa that


details of any precontract deposit must be given in writing to prospective franchisees, including details of what costs will be deducted from the deposit and under what circumstances. Precontract 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 precontract deposit must be offset 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 that 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 that 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. For a franchisor, there are benefi ts 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. l


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