rezasolhi.ca

A few years ago, I wanted to purchase a car.

I wasn't sure I would be able to secure the financing but I so desperately wanted to purchase the one car I had in mind that I put down a $1000, non-refundable deposit on the purchase. My deposit showed my good faith to the seller and, in return, he held the vehicle in reserve for me while I investigated my credit situation.

For five months he held that car for me.

During that time, many other buyers approached this seller and offered to buy the car. Each time he would answer, “I am sorry but Reza has put a deposit down on this car and I cannot sell it.” Had he broken our deal, he could have unloaded the car much sooner and gotten his money that much quicker. He could have been earning interest on that money.

But he kept the deal and held the car for me.

Sadly, after five months of trying, I discovered I was unable to secure the credit to buy the vehicle (hardly surprising given that I'd just lost my business, home and previous vehicle to creditors).

Did I then approach the dealer and ask for my deposit back?

Of course not. The deposit was lost. I had received already all the service to which that money entitled me: The reservation of the car for five months.

Did the fact that he kept my deposit make him a thief?

No. Of course not. He was entitled to the money as some compensation for his financial loss.

A deposit is something like an engagement ring: You don't get it back if you leave the bride standing at the alter. You're lucky you're not on the hook for the cost of the wedding!

The deposit acts as an incentive for both buyer and seller to adhere to the terms of their agreement. The seller is encouraged to incur whatever costs are associated with closing the deal (in this case, the cost of storing a vehicle for five months) while the buyer is encouraged to follow through with the full purchase so as not to lose the deposit sum. The deposit is also there to compensate the seller in some small way should the deal not go through.

Because I had a thousand dollars on the line, I worked very hard to secure the financing I needed to buy that car. I was very disappointed when I failed to do so. But the seller received some compensation for his wasted time.

When prospective franchisees placed deposits with my company, they did so under essentially identical terms (though with a lot more lawyering involved). The deposit initiated the complex process of building a pizza franchise location. In most cases, several toll-gates interrupted this building process at which points the franchisee was contractually obliged to pay additional deposit sums. The purpose of these check points was to insure that the deal was still going though and that the franchisee remained committed to the agreement.

This was important because through this entire process, my company was spending far more money on the location than the franchisee ever would. Franchising companies are the principle investors in every franchise location. Our enormous costs are recouped only over years of operation.

At the end of the building phase, when the location is ready, the franchisee is expected to turn over the remainder of the down-payment.

As bad publicity decreased the perceived value of our brand, many of our buyers decided to back out of the deal here at the end of the process. That would have been damaging enough to our company but these persons also wanted their deposits returned.

Many people say to me, “Anthony. Why didn't you just give them their deposits back? Wouldn't that have been easier than facing them in court and adding to the negative publicity?” I say that of course I would have preferred to do that. The problem was that the deposits did not exist. Those monies had been invested in the location.

Few people, who are not themselves entrepreneurial business owners, realize that businesses largely operate on credit. The money sunk into start-up costs for a typical franchisee does not come out of some company cash reserve. It is borrowed by the company from the bank. The bank invests in the future of the company based upon past performance. The company risks the borrowed capital as wisely as possible, with the intention of repaying the loan from profits earned.

In most cases, deposit money was spent almost immediately on costs associated with negotiating the initial deal. But many times that amount was invested by my company to pay architects, designers, builders and installers. None of these folks could give money back to me, and compared to that overhead, the deposit fee was pennies.