In the calculation of the Dryject termination fee, what is the net present value based on?
Dryject Franchise · 2025 FDDAnswer from 2025 FDD Document
- (b) The parties further agree that, in addition to such other damages awarded or any and all other damages We may have in the future for any violations of Your post-termination obligations, if this Agreement is terminated by Us because of Your default or if You terminate without cause, You shall be liable to Us for a lump sum termination fee equal to the net present value of the Royalty Service Fees and Marketing Fund Fees that would have become due following termination of this Agreement, for the period this Agreement would have remained in effect but for Your default. Royalty Service Fees and Marketing Fund Fees for purposes of this Section shall be calculated based on the Franchised Business' average monthly Gross Revenues for the twelve (12) months preceding the termination date; or (ii) a payment amount equal to the Minimum Royalty Service Fees and Marketing Fund Fees that would have become due following termination of this Agreement for the period this Agreement would have remained in effect but for Your default; whichever is greater. The payment amount would be equal to the net present value utilizing the
Prime Rate as published per the Wall Street Journal. This fee is in addition to, and not in lieu of any other damages We sustain as a result of the termination. The parties hereto acknowledge and agree that it would be impracticable to determine precisely the damages We would incur from this Agreement's termination due to Your default, and the loss of cash flow due to, among other things, the complications of determining what costs, if any, We might have saved and how much the fees would have grown over what would have been this Agreement's remaining Term. The parties consider this liquidated damages provision to be a reasonable, good faith and genuine pre-estimate of those damages, and not a penalty.
Source: Item 8 — BUSINESS RELATIONSHIP (FDD pages 68–229)
What This Means (2025 FDD)
According to Dryject's 2025 Franchise Disclosure Document, the net present value used in calculating the termination fee is based on the Prime Rate as published in the Wall Street Journal. This calculation comes into play if Dryject terminates the franchise agreement due to the franchisee's default or if the franchisee terminates the agreement without a valid reason.
The termination fee is designed to compensate Dryject for the anticipated loss of future Royalty Service Fees and Marketing Fund Fees. These fees are calculated based on either the average monthly Gross Revenues of the franchise for the 12 months preceding termination or the Minimum Royalty Service Fees and Marketing Fund Fees that would have been due for the remainder of the agreement's term, whichever amount is greater. The net present value calculation, using the Wall Street Journal's Prime Rate, then discounts these future fees to their present-day equivalent.
This clause essentially means that a franchisee who breaches the agreement could face a significant financial penalty, reflecting the projected income Dryject would have received had the agreement remained in force. The use of the Prime Rate to determine the net present value is a standard financial practice for discounting future cash flows, but franchisees should be aware of how this rate can impact the overall termination fee. Because the termination fee is based on future revenue, it is important to understand how Dryject calculates revenue and what factors could affect the amount of the fee.
It is also important to note that Dryject states that determining the precise damages from early termination is impracticable due to the difficulty of predicting cost savings and fee growth over the remaining term. Therefore, the termination fee is considered a liquidated damages provision, representing a reasonable pre-estimate of the actual damages, rather than a penalty. Franchisees should carefully consider this provision and seek legal counsel to fully understand its implications before signing the franchise agreement.