How does Alloy recognize revenue from initial and renewal franchise fees and pre-opening activities that are not distinct?
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, the company's primary performance obligation involves granting rights to its intellectual property and conducting pre-opening activities for new franchise units, such as site selection and training. Alloy distinguishes between pre-opening activities that provide a benefit to the franchisee and are not highly interrelated or interdependent to accessing Alloy's intellectual property, and those that are not brand specific and provide the franchisee with relevant general business information separate from the operation of an Alloy-branded franchise unit.
For pre-opening activities that are not distinct, Alloy considers them highly interrelated to the use of its intellectual property. Therefore, these activities are accounted for as a single performance obligation. This obligation is fulfilled by granting the franchisee rights to use Alloy's intellectual property throughout the term of the franchise agreement.
Alloy estimates the stand-alone selling price of pre-opening activities that are distinct using an adjusted market assessment approach. The company allocates the initial franchise fees and fixed consideration under the franchise agreement to the stand-alone selling price of the pre-opening activities, with any residual amount allocated to the right to access Alloy's intellectual property. The consideration allocated to pre-opening activities that are distinct is recognized when the franchisee location opens.