With dozens of pages and tens of thousands of words, franchise agreements are long, complicated and difficult to read. But, when buying a franchise, understanding the terms of your franchise agreement is extremely important, and there are three little words that could drastically increase the risks of moving forward. These words are “lost future royalties.”
As a franchisee law firm, we have helped many franchisees avoid liability for lost future royalties. We have also seen what can happen when franchisees are held liable for these royalties and can’t afford to pay. If you own a franchise, or if you are thinking about owning a franchise, here is an overview of what you need to know:
Lost Future Royalties: The Basics
Let’s start with the basics: What are “lost future royalties?”
Lost future royalties are the royalties that a franchisor would have received had a franchisee operated for the full term of its franchise agreement. They are a form of liquidated damages. As such, lost future royalties only come into play when a franchise relationship ends prematurely. Most often, this involves the franchisor terminating the franchisee due to default (i.e., non-payment of royalties).
There are a few different ways to calculate lost future royalties. One option is to apply the monthly minimum royalty (if there is one) for the remaining term of the agreement. Another option is to use the franchisee’s most-recent royalty payment or the average of the franchisee’s royalty payments over the past 12 months—again multiplying this figure by the number of payments the franchisee “should have made” for the remainder of the term.
For franchisees, these clauses present obvious concerns. In most cases, franchisors terminate franchisees that are unsuccessful. If you’ve lost your franchise because you couldn’t afford to pay your royalties, then how are you possibly going to pay months’ or years’ worth of lost future royalties in a lump sum?
Negotiating the Lost Future Royalty Clause in Your Franchise Agreement
Given the risks that lost future royalty clauses present, prospective franchisees should seek to negotiate these provisions whenever possible. Caps, restrictions on when these clauses apply and eliminating these clauses entirely are all potential options. The key is to take a strategic approach to negotiating your franchise agreement and to try to establish as much leverage as possible while focusing on the clauses that matter most.
Avoiding Liability for Lost Future Royalties
What if you’ve already signed your franchise agreement and your outlet is struggling? If you are at risk of facing liability for lost future royalties, you should speak with a lawyer promptly. You may have options available; and, if you do, it may be important to act promptly—before your franchisor issues a notice of termination.
Contact Our Franchisee Law Firm for More Information
If you have questions or concerns about the “lost future royalties” clause in your franchise agreement, we encourage you to contact our franchisee law firm for more information. Call 202-293-3947 or inquire online to schedule a free initial consultation.