NO REFUNDS WHEN IT COMES TO CURRENCY EXCHANGE PROVISIONS IN FRANCHISE AGREEMENTS

NO REFUNDS WHEN IT COMES TO CURRENCY EXCHANGE PROVISIONS IN FRANCHISE AGREEMENTS

 

Franchisors regularly use comprehensive provisions in their franchise agreements in an attempt to control how fees and other amounts payable to themselves and, in certain circumstances, their approved suppliers. When a franchisor decides to enter the international arena, the stakes are heightened and host of new issues such as withholding taxes, stamp duty, currency of payment and exchange controls can often times take center stage in the pre-sale negotiating process.

Too often, however, the parties can forget to properly analyze how an ever-evolving exchange rate between U.S. Dollars and the currency where the international prospect will be operating can greatly affect any fixed fees that might be due under a franchise agreement. Common examples include training fees (typically a flat fee of $300 to $500 per day), supplier evaluation fees ($500 to $1,000), technology fees (vary based on what services are being provided), but there are also various international franchise agreements out there that require the franchisee (or master franchisee) to pay a recurring minimum royalty or franchise location opening fee over the term of a 10 to 25-year agreement.

Given the ever-evolving global economy, including the recent unrest in the European Union and the bleak outlook on China that many financial gurus are projecting, it is critical to take into account how (A) the changing economic climate in a given country where a franchise prospect will be generating revenue could impact (B) the current exchange rate between the currency of that jurisdiction and the U.S. Dollar that most U.S.-based franchisors want to collect.  Need an example that hits close to home? Check out the graph below detailing how much a master franchisee operating in Canada would need to pay in Canadian Dollars in each of the past 4 years using the average exchange rate for each year if the master has a monthly minimum royalty payment of $5,000.

Year Total Minimum Royalty Payments Due in that Year Average Canadian Dollar to USD Exchange Rate (www.usforex.com) Total Payment in Canada Dollars
2012 $60,000USD 1.000230 $59,986
2013 $60,000USD 0.971164 $61,782
2014 $60,000USD 0.905912 $66,232
2014 $60,000USD 0.782992 $76,629
2016 $60,000USD 0.753965 $79,579

 

One way to help address the situation is to make recurring fees due under international agreements a percentage of the revenue that the franchisee or master franchisee is generating because the percentage-based fee will not be impacted by currency exchange rates in the same manner as a required flat fee in U.S. Dollars. The other important thing to remember is to make sure that BOTH parties are on the same page before executing an international agreement containing fixed fees. Otherwise, volatile exchange rates such as those displayed above between even neighboring jurisdictions such as Canada and the U.S. can create unintended consequences and possibly make the originally-negotiated deal economically unviable. When you are on the “short end” of the currency exchange rate, you will likely find that the other side will not be willing to negotiate the original terms of the agreement or will use those negotiations as leverage to get something in return.

 

 

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