Buying a Franchise: Protect Your Reservation Payment Before Signing

Prospective franchise buyers are sometimes asked to make a reservation payment before a site has been approved or the main agreement has been fully reviewed. This payment may be described as a deposit, reservation fee or commitment fee. Whatever the name, do not assume the money will be returned if the plans fall through. In franchising, clarity about payments from the outset helps build a healthy relationship between prospective franchisees and franchisors.

1. Establish exactly what you are paying for

Before transferring any money, ask for a document explaining the purpose of the payment. Does it simply hold the offer open, cover a site survey or count towards the initial franchise fee? Each has different implications if the purchase does not proceed.

Separate each component, particularly if one payment covers several services. The cost of a completed site survey, for example, should be distinguished from unused reservation funds. Do not accept a vague explanation such as “it is all included in the package” without a breakdown.

The reservation document should answer at least these questions:

• Who receives the payment and is responsible for refunding it?
• What does the prospective franchisee receive in return?
• How long will the offer or opportunity be held open?
• Will the payment be credited against a subsequent invoice?
• In what circumstances will the money be refunded or deductions made?

Also check whether the reservation form already includes an obligation to sign the main agreement. Preliminary documents are not necessarily free of legal consequences. Calling a document an “expression of interest form” does not establish that it is non-binding; you still need to read the obligations it contains.

2. Protect the review period required by law

Indonesia has specific legislation: Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. It requires franchisors to provide prospective franchisees with a franchise offering prospectus at least 14 calendar days before the franchise agreement is signed.

This period provides time to study the information before making a decision. However, the requirement to provide a prospectus should not be confused with a guarantee that every reservation payment is automatically refundable. The status of the money still needs to be clarified in the payment agreement and assessed under the applicable law.

In general, Article 1320 of the Indonesian Civil Code sets out the requirements for a valid agreement, while Article 1338 addresses the binding force of lawfully concluded agreements and their performance in good faith. Do not, therefore, assume that a payment made before the main agreement is signed cannot create binding obligations.

The safest approach is to request the prospectus, draft agreement and reservation terms before paying. Record the dates on which you receive the documents. If there are significant changes to the offer, request a written explanation and enough time to assess their impact.

Be wary of pressure to pay immediately because a discount is about to expire. A promotional deadline does not reduce contractual risk. If the reservation form already grants operating rights or imposes core franchise obligations, ask a legal adviser to assess its substance before you sign.

3. Negotiate refunds tied to clearly defined events

Wording such as “refundable in accordance with company policy” leaves too much to one party's discretion. Replace it with a list of verifiable events and their financial consequences.

For example, propose that the money be refunded if the franchisor rejects a site submitted in line with the original criteria, cannot supply the promised package or changes key commercial terms after payment. If the purchase depends on financing approval, that condition must also be agreed at the outset, rather than raised only after an application has been rejected.

Distinguish these situations from cancellation because you have changed your mind. The parties may negotiate different treatment, but any deductions should have a transparent basis. Ask for the categories of expenses that may be deducted, a maximum deduction and evidence that the expenses were actually incurred.

The refund terms should specify:

• How and where to submit a cancellation request.
• The supporting documents required.
• The deadlines for reviewing the request and paying the refund.
• The account to which the refund will be paid and who bears any transfer charges.

One possible negotiating proposal is that reservation funds will be refunded if the site is rejected in writing, with deductions limited to a previously approved and documented site survey. This is not an automatic right under franchise regulations, but a protection that needs to be expressly agreed.

4. Control the transfer and keep a record of what was agreed

Make sure the recipient's name matches the party named in the documents. If you are directed to pay an agent or affiliated company, request proof of its authority to receive the funds and written clarification of who must refund them. Do not assume that the brand owner is automatically responsible for money received by an intermediary.

Keep forms, invoices, transfer confirmations, receipts and conversations explaining any refund promises. Have important promises made during sales discussions incorporated into a document signed by an authorised representative. Request staged payments if many conditions remain unmet.

Before transferring the money, make one final check: the payment's purpose is clear, the refund conditions are specific, the recipient has been verified and the documents do not oblige you to accept an agreement you have not read.

Practical rule: do not buy thinking time with money whose status is unclear. Make a reservation payment only once you understand what you are buying, when the money can be returned and who is responsible.