Franchisors traditionally include liquidated damages provisions in their franchise agreement. A liquidated damages provision in a franchise agreement can be an important tool for a franchisor to ensure that it will be contractually and adequately compensated in the event its franchisee breaches. That said, post termination provisions can often be deal breakers for a sophisticated franchisee. A franchisor must weigh the value gained by post termination leverage over the franchisee against the restrictions imposed upon the development of the brand when mandating a liquidated damages provision.
Some franchisors are using buyback provisions as an alternative to liquidated damages. The buyback clause is a provision in a contract that grants to the franchisor the right or opportunity to repurchase the franchise under stated conditions. Using the buyback allows the franchisors to apply a predetermined penalty or discount to the repurchase of the franchise unit upon breach.