What pre-opening activities are deemed distinct by Alloy and how are they treated?
Alloy Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company's primary performance obligation under the franchise agreement mainly includes granting certain rights to access the Company's intellectual property and a variety of activities relating to opening a franchise unit, including site selection, training and other such activities commonly referred to collectively as "pre-opening activities." Certain pre-opening activities are deemed to be distinct as they provide a benefit to the franchisee and are not highly interrelated or interdependent to access to the Company's intellectual property. For all other pre-opening activities, if any, the Company will determine if a certain portion of those pre-opening activities provided is not brand specific and provides the franchisee with relevant general business information that is separate from the operation of a company-branded franchise unit. The portion of preopening activities that is not brand specific will be deemed to be distinct as it provides a benefit to the franchisee and is not highly interrelated to the use of the Company's intellectual property and therefore accounted for as a separate performance obligation.
All other pre-opening activities will be determined to be highly interrelated to the use of the Company's intellectual property and therefore accounted for as a single performance obligation, which is satisfied by granting certain rights to use the Company's intellectual property over the term of each franchise agreement.
The Company estimates the stand-alone selling price of pre-opening activities that are distinct using an adjusted market assessment approach. The Company first allocates the initial franchise fees and the fixed consideration under the franchise agreement to the stand-alone selling price of the pre-opening activities and the residual, if any, to the right to access the Company's intellectual property. Consideration allocated to pre-opening activities that are distinct are recognized when the franchisee location opens.
Source: Item 23 — RECEIPTS (FDD pages 69–245)
What This Means (2025 FDD)
According to Alloy's 2025 Franchise Disclosure Document, certain pre-opening activities are considered distinct if they provide a benefit to the franchisee and are not highly interrelated or interdependent with access to Alloy's intellectual property. Additionally, if any portion of the pre-opening activities is not brand-specific and provides the franchisee with relevant general business information separate from the operation of an Alloy-branded franchise unit, that portion is also deemed distinct.
For these distinct pre-opening activities, Alloy estimates their stand-alone selling price using an adjusted market assessment approach. The initial franchise fees and fixed consideration under the franchise agreement are allocated to the stand-alone selling price of these pre-opening activities, with any residual amount allocated to the right to access Alloy's intellectual property.
The consideration allocated to these distinct pre-opening activities is recognized as revenue by Alloy when the franchisee's location opens. All other pre-opening activities that are highly interrelated to the use of Alloy's intellectual property are accounted for as a single performance obligation, which is satisfied by granting the rights to use Alloy's intellectual property over the term of the franchise agreement.