How is the amount of liquidated damages calculated if a Buona franchisee terminates the agreement without good cause?
Buona Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchisor shall have the right to impose liquidated damages against Franchisee in the following events: (a) Franchisee terminates this Agreement without good cause, (b) Franchisor terminates this Agreement based on Franchisee's material breaches under this Agreement, (c) Franchisee abandons the Franchised Business, which for purposes of this Section is failing to open or operate the Franchised Business for more than two (2) consecutive days, (d) loses possession of the premises of the Franchised Business and fails to find a new location and to re-open the Franchised Business, or (e) Franchisee transfers an interest in the Franchised Business or the ownership of Franchisee or of the assets of Franchisee or the Franchised Business (or any interest therein) without fully complying with Article XV of this Agreement, whether or not Franchisor terminates this Agreement.
The amount of liquidated damages shall be equal to (i) the number of months remaining in the term of this Agreement, times (ii) the average Gross Sales of Franchisee's Franchised Business during the thirty-six (36) month period immediately preceding the date of termination (or if Franchisee has been in business less than 36 months, then during the entire period Franchisee has been in business), times (iii) four percent (4%), times (iv) the present value factor based on an interest rate of four percent (4%) per year (4/12% per month), using the Present Value of an Annuity.
This remedy is in addition to Franchisor's other rights and remedies set forth in this Agreement.
The liquidated damages are not a penalty or forfeiture, but are a reasonable measure of damages where the exact amount of actual damages would be difficult to ascertain.
Franchisee also agrees to pay Franchisor's costs and attorney's fees in connection with enforcing this Liquidated Damages provision.
Source: Item 23 — RECEIPTS (FDD pages 78–356)
What This Means (2025 FDD)
According to Buona's 2025 Franchise Disclosure Document, if a franchisee terminates the franchise agreement without good cause, Buona has the right to impose liquidated damages. The liquidated damages are calculated by multiplying four factors: (1) the number of months remaining in the term of the agreement, (2) the average Gross Sales of the franchisee's business over the 36 months before termination (or the entire operating period if less than 36 months), (3) four percent (4%), and (4) the present value factor based on a 4% annual interest rate (4/12% monthly), using the Present Value of an Annuity.
This calculation aims to compensate Buona for the anticipated losses resulting from the early termination, covering lost royalties and other expected revenues. The FDD states that these damages are not considered a penalty but a reasonable estimate of actual damages, which are difficult to precisely determine. This type of clause is relatively common in franchising to protect the franchisor's investment in establishing the franchise system and recruiting franchisees.
In addition to the liquidated damages, the franchisee is also responsible for covering Buona's costs and attorney's fees associated with enforcing the liquidated damages provision. This further increases the financial burden on a franchisee who prematurely terminates the agreement. Prospective franchisees should carefully consider the implications of this clause and ensure they have a solid plan for the duration of the franchise term to avoid such penalties.
It is important for potential Buona franchisees to fully understand the financial implications of terminating the agreement early and to seek legal counsel to review the franchise agreement before signing. Understanding the terms and conditions related to termination and liquidated damages can help franchisees make informed decisions and avoid potential financial pitfalls.