One of the first questions prospective franchisees ask is:
“If I pay a deposit and decide not to proceed, can I get my money back?”
It’s a fair question.
Many franchisors require an upfront payment early in the recruitment process. Depending on the system, this may be described as a:
- Deposit;
- Territory Reservation Fee;
- Holding Fee;
- Application Fee; or
- Initial Commitment Fee.
The amount varies, but it is not uncommon to see deposits of $5,000 or more.
When real money is involved, franchisees naturally want to know whether that payment is refundable if they change their mind or decide not to proceed with the franchise purchase.
The answer depends on a combination of:
- what the franchisor has said about the deposit;
- what the franchise documents provide; and
- importantly, what the Franchising Code of Conduct says.
Start With What the Franchisor Told You
The first place to look is the communication surrounding the payment.
Sometimes the position is straightforward.
A franchisor may expressly state:
“The deposit is fully refundable if you decide not to proceed with the franchise.”
If that representation has been made, the position is relatively simple.
More commonly, however, franchisors attempt to characterise the payment as non-refundable, particularly once lawyers, accountants or consultants have become involved in the process.
In some cases, the payment request itself will state that the deposit is non-refundable.
However, that is not necessarily the end of the enquiry.
The Franchising Code Can Override the Commercial Position
Many prospective franchisees are surprised to learn that the Franchising Code of Conduct contains specific provisions dealing with payments made during the disclosure process.
Section 23(8) provides that where:
- a prospective franchisee makes a payment to the franchisor (or an associate of the franchisor) during the consideration period; and
- the prospective franchisee subsequently requests repayment in writing,
the franchisor must repay that amount within 14 days of receiving the request.
Importantly, breach of this provision attracts a civil penalty of up to 600 penalty units.
In other words, whether a payment is described as a “deposit” or a “territory reservation fee” is not necessarily determinative.
The critical question is whether the payment was made during the consideration period.
What Is the Consideration Period?
This is where things become more complicated.
The consideration period is established by section 23 of the Code.
In simple terms, a franchisor cannot enter into a franchise agreement until at least 14 days have passed after providing the required disclosure documentation. Those documents include:
- the franchise agreement in the form in which it is to be executed;
- the disclosure document;
- a copy of the Franchising Code of Conduct; and
- where applicable, lease and occupancy documentation.
The purpose of the consideration period is to ensure prospective franchisees have adequate time to review the documents, obtain advice and make an informed decision before signing.
The Clock Can Restart
One of the most commonly misunderstood aspects of the Code is that the consideration period can restart.
For example, the 14-day period may begin again if:
- the franchisor provides earnings information after disclosure has occurred; or
- the franchisor makes substantive changes to the franchise agreement.
As a result, determining whether a deposit was paid during the consideration period is not always straightforward.
The answer may depend on the entire chronology of the transaction.
Don’t Forget Related Agreements
Another provision that is frequently overlooked is section 30 of the Code.
Where a franchisee is required to enter into related agreements, the franchisor must generally provide copies of those agreements before execution.
Examples include:
- intellectual property licences;
- security agreements;
- guarantees;
- loan agreements;
- confidentiality agreements;
- restraint agreements; and
- certain lease or occupancy arrangements.
In practice, these documents often form part of the overall franchise package.
Their timing can impact the broader disclosure process and should not be overlooked when assessing compliance with the Code.
What Happens After You Sign?
Once the franchise agreement has been executed, the position changes significantly.
In most franchise systems, any deposit previously paid will be applied towards:
- the Initial Franchise Fee;
- documentation fees; or
- other amounts payable on signing.
At that point, the deposit generally loses its separate identity and becomes part of the broader contractual payment framework.
However, that does not mean all rights disappear.
Cooling Off Rights
The Franchising Code provides franchisees with statutory cooling off rights.
In most cases, a franchisee may terminate a new franchise agreement within 14 days after entering into it.
Where a franchisee validly exercises those cooling off rights, the franchisor must:
- refund all payments connected with the agreement; and
- do so within 14 days,
subject only to any deduction for reasonable expenses that are expressly provided for in the franchise agreement.
Accordingly, even where a deposit has become part of the Initial Franchise Fee, cooling off rights may still result in most or all of that payment being refunded.
The Practical Takeaway
If you are looking to buy a franchise and are being asked to pay a deposit, do not assume the payment is automatically refundable.
Equally, do not assume it is automatically non-refundable simply because the franchisor says so.
The answer depends on:
- the terms on which the payment was requested;
- whether the payment was made during the consideration period;
- whether the franchisor has complied with the disclosure requirements under the Code;
- whether the franchise agreement has been signed; and
- whether any cooling off rights remain available.
Before paying a significant deposit, it is worth obtaining advice on exactly where you sit in the franchise process and what rights may exist if you later decide not to proceed.
For many prospective franchisees, understanding whether a deposit is refundable can mean the difference between losing thousands of dollars and preserving the flexibility to walk away from a deal that no longer makes commercial sense.