Can Expenses Affect Licensing Fees in a Profit Share Agreement?

Question from Lee, Can Expenses Affect Licensing Fees in a Profit Share Agreement?

Answer from AI:

When interpreting the terms of a profit share agreement, it’s important to understand how revenue, expenses, and net profits are defined within the context of the agreement. The specific language used in the agreement will guide how the profit share is calculated and what components are included or excluded.

Understanding the Agreement’s Language

Based on the verbiage provided:

1. The profit share is based on “restaurant revenue,” which explicitly includes “licensing fees” and “net profits.”
2. The profit share percentages are clearly defined for each of the first three years.

Analysis of Key Terms

Licensing Fees: Licensing fees are typically payments made by one party to another for the right to use a particular property, brand, or technology. In this context, it seems that licensing fees are part of the revenue.

Net Profits: Net profits generally refer to the amount of money that remains after all operating expenses, taxes, interest, and other costs have been subtracted from total revenue.

Are Expenses Included?

The agreement states that the profit share is based on restaurant revenue, which includes licensing fees and net profits. However, it does not explicitly state that expenses are to be deducted from the licensing fees before calculating the profit share. Since net profits are mentioned, it implies that expenses are considered when determining net profits, but not necessarily when calculating the share of licensing fees.

Legal Interpretation and Advice

Interpreting contract language can be complex, and small nuances in wording can significantly impact the parties’ obligations and entitlements. If there is ambiguity in the contract or if the parties disagree on the interpretation, legal principles such as the “parol evidence rule” or the “contra proferentem rule” may apply. These rules help courts determine how to interpret contract language when there is a dispute.

• The parol evidence rule limits the use of outside evidence to interpret the written terms of a contract.
• The contra proferentem rule suggests that any ambiguous terms in a contract should be interpreted against the interests of the party that drafted it.

Seeking Legal Advice

If you are a party to this agreement and are unsure about how expenses impact the calculation of your profit share, it is advisable to consult with a legal professional who can provide personalized advice. An attorney can review the entire agreement, consider the context, and advise on the likely interpretation of the terms based on applicable laws and precedents.

Conclusion

The provided verbiage does not explicitly state that expenses are to be deducted from licensing fees before calculating the profit share. It does, however, include net profits as part of the revenue, which suggests that expenses are considered at some point in the calculation. For a definitive interpretation and application of the agreement to specific circumstances, legal advice is necessary.