What rationale does Cinnaholic provide for the liquidated damages clause in the event of termination?
Cinnaholic Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchisee acknowledges and confirms that by granting Franchisee the license to operate the Bakery in the Franchise Territory, Franchisor lost the opportunity to grant a franchise for the Franchise Territory to another person or entity or to itself to own and operate a Bakery within the Franchise Territory. Additionally, Franchisee confirms that Franchisor will suffer substantial damages by virtue of the termination of this Agreement, including, without limitation, lost Royalty Fees, lost market penetration and goodwill in the Franchise Territory, lost opportunity costs and the expense Franchisor will incur in developing another franchise for the Franchise Territory, which damages are impractical and extremely difficult to ascertain and/or calculate accurately, and the proof of which would be burdensome and costly, although such damages are real and meaningful to Franchisor and the CINNAHOLIC® System. Accordingly, in the event that Franchisor terminates this Agreement for Franchisee's default hereunder, Franchisee agrees to pay to Franchisor in a lump sum on the effective date of termination, liquidated damages, which represents a fair and reasonable estimate of Franchisor's foreseeable losses as a result of such termination, and which are not in any way intended to be a penalty, in an amount determined as follows:
- (i) the average annual amount of Royalty Fees payable by Franchisee to Franchisor for the two years immediately preceding the date of termination provided, however, if the Bakery has not been open for at least two years, the average monthly amount of Royalty Fees payable by Franchisee to Franchisor for the months in which the Bakery has been open multiplied by 12;
- (ii) multiplied by two; however, if the Franchise Agreement term has less than two years remaining, then multiply by the number of years (or portions of a year) remaining in the term.
Source: Item 22 — CONTRACTS (FDD pages 61–62)
What This Means (2025 FDD)
According to Cinnaholic's 2025 Franchise Disclosure Document, the franchisor includes a liquidated damages clause in its franchise agreement to address the financial losses it would incur if the agreement is terminated due to the franchisee's default. Cinnaholic argues that when it grants a franchise for a specific territory, it forgoes the opportunity to award that franchise to someone else or to operate a Cinnaholic bakery itself in that area.
Cinnaholic states that the termination of a franchise agreement results in substantial damages to them. These damages include lost royalty fees, reduced market presence and goodwill in the territory, lost opportunity costs, and the expenses associated with finding and developing a new franchise for the territory. Cinnaholic claims that these damages are difficult to calculate accurately and proving them in court would be burdensome and costly, even though the damages are real and significant to Cinnaholic and its franchise system.
Therefore, the liquidated damages clause is designed to provide a fair and reasonable estimate of Cinnaholic's foreseeable losses resulting from the termination, rather than serving as a penalty. The liquidated damages are calculated as the average annual royalty fees paid by the franchisee over the two years before termination, multiplied by two. If the bakery has been open for less than two years, the calculation uses the average monthly royalty fees multiplied by 12 to annualize it. If the remaining term of the franchise agreement is less than two years, the multiplier is adjusted to reflect the actual number of years remaining.