Buying a Franchise: Protecting Advance Payments Before Opening

Joining a franchise network often starts with a payment before finance, premises or the conditions needed to open are in place. Such a payment may be justified, but calling it a ‘reservation fee’ does not, in itself, protect the buyer. Before transferring any money, establish in writing what the franchisor undertakes to do in return, when the payment becomes non-refundable and in what circumstances it must be repaid. This guide focuses on protecting your money before trading begins.

1. Distinguish between reservation fees, advance payments and earnest money

Ask for the document accompanying the payment to state its purpose clearly. Are you reserving an opportunity to negotiate, securing time-limited priority for a particular location or paying part of the initial franchise fee in advance? These involve different obligations and should not be grouped together under the catch-all term ‘deposit’.

An advance payment is a payment made ahead of the future performance of an obligation. Whether and how it must be refunded depends on the contract and the legal grounds on which the transaction failed to proceed. Earnest money, known in Croatian as kapara, has specific legal effects under Croatia’s Civil Obligations Act: it is linked to the conclusion and performance of a contract, and the consequences of non-performance depend, among other things, on which party is responsible. Earnest money is not automatically a fee allowing you to walk away freely; that option must be expressly agreed.

A reservation fee may be separately agreed in return for a specific commitment, such as a genuine undertaking by the franchisor not to negotiate with other candidates for the same location for a set period. You should therefore insist on answers to four questions:

• What exactly does the payment entitle me to?
• How long does that entitlement last?
• Will the amount be credited towards the initial franchise fee later?
• Which events trigger a refund or justify retaining the money?

Do not assume that the description on an invoice settles everything. The agreement, offer, invoice and draft main contract should all be consistent.

2. Know what Croatian law protects and what you need to agree contractually

Croatia has no franchise-specific legislation and no dedicated mandatory pre-contractual disclosure system requiring a standard document and a prescribed waiting period before payment. Contractual relationships are governed primarily by the Civil Obligations Act, including its rules on good faith and fair dealing, negotiations, performance, termination and the consequences of non-performance.

Depending on the nature of the relationship, Croatia’s Competition Act and applicable European Union competition rules may also be relevant. However, they do not create a general right to a refund of a reservation payment simply because a prospective franchisee changes their mind.

The franchise register maintained by the Croatian Chamber of Economy (HGK) is neither a mandatory state approval process for franchise offers nor a guarantee that your payment is safe. Nor does a reference to a franchise industry code of ethics replace a clearly agreed right to a refund.

When buying a franchise for business purposes, do not rely on the consumer right to a fourteen-day cooling-off period as general protection. Likewise, liability for conducting negotiations in bad faith is not the same as an automatic refund of every payment. For this reason, a lawyer should review the agreement before you pay, not merely before you sign the final contract.

3. Make payment conditional on verifiable requirements

If the project depends on external decisions, turn these into clearly defined contractual conditions. Wording such as ‘a refund if the project fails’ is too broad and leaves room for disputes. It is better to address financing approval, the franchisor’s written approval of the location and the ability to meet the requirements for operating the business separately.

For each condition, agree:

• Deadline: when it must be met.
• Evidence: which document confirms whether it has been met.
• The candidate’s obligations: for example, submitting a complete loan application on time.
• Consequence: whether the agreement ends, whether it can be extended and whether the full amount is refundable.
• Refund procedure: who must receive notice and when the money must be repaid.

For financing, simply stating ‘loan approved’ is not enough. A lender may offer an insufficient amount or require security you cannot accept. Agree the relevant limits defining acceptable financing, rather than assuming that any bank offer will suffice.

Distinguish between failure to meet such a condition and your decision to withdraw without a contractually agreed reason. The franchisor may reasonably seek different consequences for each, but these must be clear in advance and comply with mandatory legal requirements.

4. Limit the amount at risk and check the recipient

Rather than paying the entire initial franchise fee upfront, negotiate staged payments linked to specific obligations that have actually been fulfilled. If the franchisor retains money to cover preparatory costs, ask for a predefined scope, a cap and evidence of services actually provided. Avoid open-ended provisions allowing the deduction of ‘all administrative costs’.

Check the contracting party’s full legal name, Croatian personal identification number (OIB), the signatory’s authority and the ownership of the bank account you are paying into. If an intermediary or affiliated company receives the payment, the agreement must explain the basis on which it receives the money and who is responsible for any refund.

A right to a refund is worth less if the recipient has no funds available to repay you. For larger advance payments, discuss suitable security or an arrangement for a third party to hold the funds with your lawyer, with clear release conditions and costs.

Practical takeaway: before paying, obtain written answers to three questions: what you receive, when the money becomes non-refundable and who must repay it if the agreed conditions are not met. If the answers are unclear, postpone payment.