Placing a franchise deposit is a commitment!

Money talks, and so potential franchise owners placing a franchise deposit is a key element in successful franchising. As a result of this commitment a number of things can happen. Firstly the franchisor has filtered out the tyre kickers from the serious entrepreneurs. Without that commitment everyone is just talking about it. Secondly the Franchisor can start committing funds to the eventual franchise launch. That might be acquiring stock, instructing web developers, printing business cards etc etc. A deposit gets the show on the road and crucially secures the rights for that franchisee in the given location.

Security

When a franchisee puts down a franchise deposit the Franchisor is going to take that location off the market and turn others away. This offers security to the new franchisee who can then work their way towards ownership. There is often a period of time required for this and so the deposit allows the franchisee to organise their funding, maybe serve a notice period with an employer, and generally get themselves ready.

How much should a franchise deposit be?

10% of the investment is normal. But from a Franchisors perspective it’s really about showing commitment. All Franchisors constantly deal with dreamers and wanna be’s who don’t commit. Here at Lime Licensing Group we advise 50+ franchisors at any time and because we handle their enquiries we often see the same name popping up for numerous franchises. They aren’t serious leads 95% of the time. Those who are going to separate themselves as a serious lead recognise the need to show commitment with a franchise deposit.

How long should a franchise deposit last for?

In non premises based, owner operator business formats around 3 months should be fine for everyone to raise funds, serve notice periods and generally get ready to attend training. However, when premises are involved it is a difficult decision for a franchisor to make. Furthermore no two franchisors are the same. Deposit periods vary widely between different business formats.

Site selection is often the slowest process in retail format franchise launches and if a Franchisee wants to have first dibs on Doncaster for example, then the deposit period ought to allow them the time to secure premises. It could be 6 months, some are 12 months. Some retail franchisors don’t accept any deposit at all, you just pay the franchise fee and that mobilises the franchisor and you to find premises and get open with a certain time period.

It’s important that the Franchisor isn’t turning someone away who might do it quicker so some activity reporting is necessary unless the franchisor is going to take an active role in helping to secure a location. Some do, some don’t.

What happens if the franchise deposit expires?

It doesn’t mean that the franchisee has lost the right to join. In some cases it can mean that they have just lost the exclusive right to open in that area. In such cases the Franchisor could accept a further deposit to extend the period. Otherwise the deposit expires and that investment has been lost.

Deposit Agreement

The terms of the deposit are set out in a deposit agreement. Less than one page in length it should clearly state what the deposit is fr and under what circumstances a refund, or not, is available. From the franchisors perspective there is usually a great deal to do when a franchisee wants to join and so depending on the level of the deposit many have no refund rights at all.

Is your franchise brand following best practice for franchise deposits?

Contact a Lime Licensing Group specialist for a deep dive into this important aspect of franchisor life!