Buying a Franchise: Protect Your Reservation Payment

A reservation payment may seem like a small step towards joining a franchise network. But it can create binding commitments before you have assessed the full franchise agreement. If a franchisor asks for money to keep an opportunity open, you should therefore treat the reservation as a separate agreement – not merely an administrative formality.

Clarify exactly what you are reserving

Start by establishing what the franchisor must provide in return for your payment. Is it a temporary reservation of a specific location, access to a selection process or payment for specific preparatory work? These three situations do not necessarily give you the same rights.

Terms such as ‘deposit’, ‘reservation’ and ‘start-up payment’ do not, on their own, tell you whether you can claim your money back. What matters is the substance of the agreement and the circumstances in which the payment is made.

Ask for a short reservation agreement that answers these questions:

• What specific opportunity is being kept open, and until what date?
• Can the franchisor negotiate with others about the same opportunity during that period?
• What activities must the franchisor carry out during the reservation period?
• Will the payment be credited towards the initial franchise fee if you buy the franchise?
• Does the reservation commit you to signing the franchise agreement later?

Above all, distinguish between the right to explore an opportunity and an obligation to buy it. If the purpose is to give you time for a thorough assessment, the agreement should not also contain an unconditional commitment to buy.

Understand the Danish rules before you pay

Denmark has no specific franchise legislation, no mandatory franchise disclosure document and no dedicated registration scheme for franchisors or franchise agreements. A reservation is therefore not protected by a separate Danish franchise regime that automatically sets payment or refund terms.

The Danish Contracts Act and general principles of contract law are central. Freedom of contract is the starting point, although legislation including the Danish Marketing Practices Act and Competition Act may also be relevant. The rules that apply in practice depend on the terms of the reservation and the parties’ conduct.

There is also no statutory cooling-off period specifically for franchises. You should not assume that consumer cancellation rights protect a payment made with a view to setting up your own business. Ask your adviser to assess your particular agreement rather than assuming you can withdraw freely.

The absence of specific disclosure requirements does not, however, mean that a franchisor is free to mislead you or withhold material information. General principles of good faith and duties of disclosure may require relevant information to be provided before an agreement is entered into. Incorrect or withheld information may have legal consequences, depending on the circumstances. This is not, however, a simple, automatic route to recovering a payment.

Agree refund terms for specific situations

Avoid settling for wording such as ‘refundable by further agreement’. Decide in advance which events will trigger a refund and what supporting documents, if any, will be required.

Discuss at least the following situations with the franchisor:

• You decide not to proceed: Can you decline after completing your review, and what will it cost you if you do?
• The franchisor rejects your application: Will the full amount be refunded if you are not approved as a franchisee?
• The opportunity falls through: What happens if the reserved location is no longer available?
• The franchisor changes the offer: Can you get your money back if the final agreement contains material terms that differ from those on which the reservation was based?
• The deadline expires: Does the reservation end automatically, and what happens to the payment?

If the franchisor wants to retain payment for work carried out, that work should be described and any deductions clearly limited. For example, you could propose that only documented expenses approved in advance may be deducted, up to an agreed maximum. This is a negotiating suggestion, not a statutory right.

Also agree a specific deadline for any refund. A clear right to repayment is worth less in practice if the timing is left open or the parties disagree about who must initiate the process.

Limit your risk while you assess the opportunity

Consider whether the opportunity could be reserved without payment or through smaller staged payments. A substantial upfront payment shifts risk onto you before the franchisor’s final obligations are clear.

Check which legal entity is receiving the money and confirm that it is also responsible for any refund. If you are paying a company other than the one you are contracting with, the relationship between them and their respective responsibilities must be clearly explained. Keep the agreement, payment request and receipt together.

For a substantial sum, ask your lawyer whether an escrow arrangement with clear conditions for releasing the funds would be appropriate. Simply paying money into the franchisor’s account does not guarantee that it will be available if a refund becomes due.

Finally, have your adviser review the reservation agreement alongside any confidentiality agreements and letters of intent. Binding commitments may be spread across several documents, even if the payment itself is mentioned in only one.

Practical takeaway: Only pay once you can explain precisely what you are reserving, what you are committing to and how you will get your money back if the purchase does not go ahead.