When are the initial franchise fees recognized as revenue by Antioch Pizza Shop?
Antioch_Pizza_Shop Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company is required to allocate the transaction price associated with initial franchise fees between the franchise license and associated performance obligations. In identifying the associated performance obligations, the Company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952- 606, Franchisors—Revenue from Contracts with Customers. In addition, the practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation, which the Company has elected to adopt. These pre-opening services include the following (which the Company may or may not provide all of):
- Assistance in the selection of a site
- Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
- Training of the franchisee's personnel or the franchisee
- Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
- Bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes about local regulations affecting the franchisee's business
- Inspection, testing, and other quality control programs
In determining the allocation of transaction price (the initial franchise fee) to either the license or to the preopening services, the Company has determined that the standalone selling price of its pre-opening services exceeds the initial franchise fee received; as such, the Company allocates the entire initial franchise fees to those preopening services. The franchise fees are then recognized as revenue when those pre-opening services have been completed (which generally occurs upon commencement of the associated franchised location's operations).
Source: Item 21 — Financial Statements (FDD page 56)
What This Means (2025 FDD)
According to Antioch Pizza Shop's 2025 Franchise Disclosure Document, the company recognizes initial franchise fees as revenue when the pre-opening services related to the franchise agreement have been completed. These pre-opening services, which Antioch Pizza Shop may or may not provide all of, include site selection assistance, help with facilities and preparation (including financing, architectural, and engineering services, and lease negotiation), personnel training, providing operations manuals, bookkeeping, IT, advisory services, and quality control programs.
Antioch Pizza Shop allocates the entire initial franchise fee to these pre-opening services because the standalone selling price of these services exceeds the initial franchise fee. As a result, the franchise fees are recognized as revenue when these pre-opening services are completed, which typically happens when the franchised location commences operations.
For a prospective franchisee, this means that Antioch Pizza Shop does not recognize the initial franchise fee as revenue until the franchisee's location is ready to open and begin operations. This accounting practice aligns the revenue recognition with the delivery of the pre-opening services, which is a common approach in the franchise industry.