How is variable sales-based royalty income recognized for Bath Tune Up franchisees?
Bath_Tune_Up Franchise · 2025 FDDAnswer from 2025 FDD Document
Royalty income – are the franchisee royalty fees that are included in the franchise agreements. The variable sales-based royalty is determined to be variable consideration because it is recognized as revenue as the related sales are earned by the franchisees. Therefore, variable sales-based royalty income is recognized in the same period the sales are generated. Sales-based fees qualify under the royalty constraint exception and do not require an estimate of future transaction price. The percentage of royalty applied on the sales varies based on franchise agreements, and may include royalty percentage de-escalation clauses whereby the royalty percentage applied on the sales generated are decreased if certain sales thresholds are obtained.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 51–52)
What This Means (2025 FDD)
According to Bath Tune Up's 2025 Franchise Disclosure Document, variable sales-based royalty income is recognized as revenue in the same period the sales are generated by the franchisees. This is because the royalty is considered variable consideration. This means that Bath Tune Up recognizes the royalty income at the same time the franchisee makes the sales.
This approach is allowed under accounting standards ASC 606 and ASC 952 for private companies. Because the fees are sales-based, they qualify for the royalty constraint exception, which means Bath Tune Up does not have to estimate future transaction prices when recognizing the revenue.
The percentage of royalty applied to sales can vary based on the specific franchise agreement. Some agreements may include de-escalation clauses, where the royalty percentage decreases if the franchisee achieves certain sales thresholds. This could incentivize franchisees to increase their sales volume to benefit from a lower royalty rate.