We recommend this option as it’s the simplest and least expensive way to handle the financial assurance requirement. You simply do not collect any initial fees owed to you until you’ve performed all your pre-opening obligations and the franchisee’s business is open and operating. The fee deferral option doesn’t require involvement from any outside institutions like the state or a bank. While some states may require a written agreement to govern the fee deferral, such agreement would only be between you and your franchisee. While there is some risk that the franchisee may walk away prior to opening, as long as they’re spending money on things like an attorney, incorporation or formation of an entity, and a real estate search, they’re less likely to quit.
The definition of “open for business” is something with which you want to be careful. For a brick-and-mortar business, it’s easy – when they open their doors to the public! For service businesses, a franchisee may be open for business but may not have a client yet. You will want to discuss the definition of “open for business” with us so we so we can spell it out in your franchise agreement very clearly.