How does 7 Brew recognize continual service fees, royalty fees, and other revenue?
7_Brew Franchise · 2025 FDDAnswer from 2025 FDD Document
Deferred franchise fees on the Balance Sheets.
Continual service fees, royalty fees, and other revenue
Continual service fees, royalty fees, and other revenue are recognized at a point in time in the period earned.
Revenue from sales-based royalties is recognized as the related sales occur.
Brand fund contributions and costs are presented gross in the accompanying Statements of Operations as the Company was determined to be the principal in these arrangements. The purpose of the brand fund is to provide advertising, marketing, research and development,
Notes to Financial Statements
public relations, social media management, customer relationship management, technology programs, and other activities the Company deems appropriate to enhance, promote, and protect the 7 Brew® brand and franchise system.
Other revenue consists primarily of technology subscriptions revenue from franchisees. For certain technologies utilized by the Company and its franchisees, the Company enters into master agreements with the technology vendor for the rights to license the technology to its franchisees. The collection of revenue from franchisees for these technology services represents a performance obligation that is separate from the other revenue streams.
Expenses related to the above activities are included in the Other operating expenses line item on the Statements of Operations.
The Company derives its revenues from franchisees located throughout the United States.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 82)
What This Means (2025 FDD)
According to 7 Brew's 2025 Franchise Disclosure Document, continual service fees, royalty fees, and other revenue are recognized at a specific point in time during the period they are earned. Specifically, revenue from sales-based royalties is recognized as the related sales occur. This means that 7 Brew recognizes these revenues when the franchisee makes a sale, aligning the revenue recognition with the actual transaction.
Additionally, the FDD mentions a gift card program managed by 7 Brew, where franchisees sell gift cards redeemable for 7 Brew products. The company collects all funds from the activation of gift cards and initially records a liability for unredeemed gift cards. The company may recognize revenue from unredeemed gift cards, termed "breakage revenue," if the likelihood of redemption is deemed remote due to long periods of inactivity. For example, in 2024, 7 Brew recognized breakage income of $1.5 million, which was recorded within continual service fees, royalty fees, and other revenue.
For a prospective franchisee, this means that a portion of 7 Brew's revenue is derived from royalties based on their sales, which is recognized immediately as sales occur. Additionally, franchisees should be aware that 7 Brew also benefits from unredeemed gift cards, which are eventually recognized as revenue. The brand fund contributions and costs are presented gross in the Statements of Operations, as 7 Brew is the principal in these arrangements. The brand fund is used for advertising, marketing, research and development, public relations, social media management, customer relationship management, and technology programs to enhance the 7 Brew brand and franchise system.