Under what condition related to Gross Funds can the Management Recruiters franchise agreement be terminated?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
- **20.5.
Buy-Out Termination.** Commencing on January 1 of the last full calendar year of the Initial Term under this Agreement, Franchisee may terminate this Agreement and
Franchisor will waive the competitive restrictions imposed by Section 17 on the following conditions:
- Franchisee must send Franchisor written notice ("Notice") six (6) months prior to the date of the proposed buy-out;
- Franchisee must pay Franchisor a buy-out price equal to fifteen percent (15%) of the Gross Funds of the Franchise Business during the immediately preceding twelve (12) calendar months;
- the Notice must include a cash deposit of one-third (1/3) of the amount due Franchisor for the buy-out, along with a promissory note ("Note") for the balance upon such terms and on such forms as Franchisor prescribes, and Franchisor's standard form of mutual termination agreement utilized in this context;
- Interest on the Note accrues from the date Franchisor receives the Notice;
- If, after sending such Notice to Franchisor, Franchisee does not consummate the transaction, Franchisor may either: (i) retain fifty percent (50%) of the deposit paid with Franchisee's Notice as liquidated damages, and not as a penalty, and keep this Agreement in force; or (ii) purchase the Franchise Business by paying to Franchisee an amount equal to the then net book value of the tangible assets of the Franchise Business, as disclosed in the balance sheet for the Franchise Business, provided that each depreciable asset shall be valued as if it had been depreciated on a "straight-line" basis from the date of its acquisition over its useful life without provision for its salvage value, retain the deposit and return the Note.
Source: Item 23 — RECEIPTS (FDD pages 67–327)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, a franchisee can terminate the franchise agreement under a "Buy-Out Termination" scenario, which involves a payment based on Gross Funds. Specifically, commencing on January 1 of the last full calendar year of the initial term, a franchisee may terminate the agreement. To do so, the franchisee must provide written notice to Management Recruiters six months prior to the proposed buy-out date.
As part of this termination process, the franchisee is required to pay Management Recruiters a buy-out price. This price is equivalent to fifteen percent (15%) of the Gross Funds generated by the franchise business during the twelve calendar months immediately preceding the termination notice. The franchisee must also include a cash deposit of one-third (1/3) of the total buy-out amount along with a promissory note for the remaining balance, using Management Recruiters' standard form for such agreements. Interest accrues on the promissory note from the date Management Recruiters receives the termination notice.
If the franchisee initiates the buy-out process but does not complete the transaction, Management Recruiters has options. They can either retain fifty percent (50%) of the initial deposit as liquidated damages while keeping the franchise agreement active, or they can purchase the franchise business from the franchisee. If Management Recruiters chooses to purchase the business, they will pay the franchisee an amount equal to the net book value of the tangible assets, calculated using straight-line depreciation, and will retain the initial deposit while returning the promissory note.