Managing Reservation Payments from Prospective Franchisees

Business owners starting to build a franchise network often use reservation payments to confirm that prospective franchisees are serious. However, an upfront payment can lead to disputes if the prospective franchisee believes it is refundable while the business owner regards it as a fee they are already entitled to retain. Before accepting any payment, draw up written rules that distinguish reservation payments from franchise fees and outlet preparation costs.

1. Keep reservations separate from the grant of franchise rights

Indonesia regulates franchising specifically through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. This regulation requires franchisors to provide prospective franchisees with a franchise offering prospectus at least 14 calendar days before the franchise agreement is signed. Franchisors must also hold a Franchise Registration Certificate, known locally as an STPW, before entering into that agreement.

Do not use a reservation document as a shortcut to bypass these obligations. The document’s title is not the only consideration; its substance must also be examined. If it already grants rights to operate the business system, use the brand and enjoy the economic benefits of the franchise, it requires legal review rather than simply being labelled a ‘reservation form’.

Your internal policy should make clear that a reservation does not, in itself, authorise anyone to open an outlet, use the brand in promotions or present themselves as a franchisee. Nor does payment replace the proper disclosure and agreement-signing process.

The prospectus disclosure period is not automatically a cooling-off period carrying a right to a refund. Reservation refund rights must therefore be explained separately, taking applicable law into account.

2. Define exactly what is being reserved

Before setting the amount, answer a basic question: what benefit does the prospective franchisee receive during the reservation period? Avoid accepting money simply to ‘secure an opportunity’ without explaining what that opportunity is.

A reservation might, for example, hold a slot for discussions about opening an outlet until a specified date. If it concerns a development opportunity in a particular area, explain its limits and do not promise exclusivity that has not been agreed in the franchise agreement.

The reservation document should include:

• The identities of the party receiving the payment and the party making it.
• The purpose and amount of the payment.
• The reservation’s start and end dates.
• The activities to be carried out during the reservation period.
• The conditions that must be met before the process can proceed.
• How the payment will be treated if the franchise agreement is ultimately signed.

Specify whether the payment will be credited towards the franchise fee or refunded through a separate process. Do not allow it to become an additional charge that is only explained shortly before signing.

Also distinguish reservations from payments for specific work. If a prospective franchisee requests an additional site survey or bespoke design, set out the work, costs and approval separately. This helps both parties understand which sums are being held on their behalf and which are payments for work actually commissioned.

3. Base refund rules on the reason for cancellation

A clause stating that ‘payments are non-refundable under any circumstances’ is easy to write, but risks provoking objections when the franchisor itself cannot proceed. A clearer policy distinguishes between the reasons for cancellation and their consequences.

Create an internal matrix covering the following situations:

• The franchisor rejects the prospective franchisee: specify the refund arrangements and processing deadline.
• The prospective franchisee withdraws: explain whether any agreed deductions apply and how they are calculated.
• Opening requirements are not met: specify how the funds will be treated if the site, funding or other requirements cannot be secured or satisfied.
• The franchisor is not yet able to proceed: offer a refund or an extension, subject to written agreement.
• The reservation period expires: do not automatically continue holding the money without an agreed procedure.

Any deductions should relate to work or costs that can be explained and evidenced. Avoid using the term ‘administration fee’ without a breakdown. Also specify when a refund request is considered complete, who approves it and when the refund will be transferred.

As good relationship-management practice, provide a written explanation before the prospective franchisee pays, not after they request cancellation. Ask a legal adviser to assess the fairness and enforceability of the clauses; a signature alone does not eliminate all legal risks.

4. Control how funds are received and settled

Use an official bank account belonging to the party named in the reservation document. Issue a receipt stating the purpose of the payment, rather than a generic receipt referring only to a ‘partnership package’. The recruitment team must not alter refund terms through private conversations.

Maintain a tracking register recording the prospective franchisee’s name, payment date, reservation period, prospectus disclosure status, approved work and final decision. Agree the accounting treatment with an accountant: funds that may still need to be refunded should not be recognised immediately as revenue without assessing the substance of the transaction.

When the process ends, send a written summary. If it proceeds, show the amount credited in the next payment document. If it is cancelled, include the refund calculation and proof of transfer. This simple step helps maintain trust within the franchise network.

Practical takeaway: do not accept reservation payments until their purpose, validity period and refund rules are clear. A reservation should help organise the process, not pressure prospective franchisees into signing an agreement before they are ready.