How does a Cordova franchisee compensate Cordova for taxes imposed on the Royalty Fee?

According to Cordova's 2025 Franchise Disclosure Document, if any federal, state, or local tax (other than income tax) is imposed on the Royalty Fee, and Cordova cannot directly offset this tax against other taxes they are required to pay under applicable laws, the franchisee must compensate Cordova. This compensation is structured to ensure that the net amount of Royalty Fees Cordova receives is not less than the greater of two amounts: 10% of the franchisee's monthly Gross Sales, or the applicable Minimum Quarterly Royalty Fee Requirement. Cordova will prescribe the manner in which the franchisee must provide this compensation.

In simpler terms, if a new tax is levied on the royalty payments that Cordova receives from its franchisees, Cordova aims to maintain its net royalty income. The franchisee is responsible for covering the cost of this tax, ensuring Cordova's royalty revenue remains at the agreed-upon level. This is calculated based on either a percentage of the franchisee's gross sales or the minimum quarterly royalty fee, whichever is higher.

For a prospective Cordova franchisee, this means that in addition to the standard royalty fee of 10% of gross sales, they may also be responsible for covering any taxes imposed on that royalty fee. This could impact the franchisee's overall profitability, as it adds an additional cost to their operations. It is important for potential franchisees to understand this obligation and factor it into their financial projections. They should also seek clarification from Cordova regarding the specific manner in which they would be required to compensate Cordova for such taxes, as Cordova retains the right to prescribe the method of compensation.