What are the components of each franchise agreement for Beauty Bungalows?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
When a franchisee purchases a franchise, the Company grants the franchisee the rights to operate in a designated area and to use the proprietary methods, techniques, trade dress, trademarks, and logos ("the license"). The license is considered to be symbolic intellectual property. Revenues related to the license are continuing royalties based on a fixed percentage of gross sales of each location. These revenues will be used to continue the development of the Company's brand, the franchise system and provide ongoing support for the Company's franchisees over the term of the agreement. The royalties are billed monthly and are recognized as revenue when earned. For the years ended December 31, 2024 and 2023, there were no royalties earned.
Revenue from initial fees is allocated to the performance obligations in the franchise agreement that are distinct from the territory and license rights. These primarily include training services, opening support services, opening marketing assistance and franchisee acquisition and acceptance. The amount allocated to each identified performance obligation is determined using the expected cost plus a margin approach. Revenue from initial fees is recognized when the performance obligation is satisfied, and control of the goods or service has been transferred to the franchisee. Performance obligations that are normally satisfied by the opening of the franchised business to the public are determined to be earned during the period from the execution of the contract to the opening of the franchised business which is generally less than one year. Unearned initial fee revenues from franchisee acquisition and acceptance will be recorded as deferred nonrefundable revenue and recognized as revenue over the term of the contract which is currently 10 years from the date the franchisee opens the franchise business to the public. Incremental costs of obtaining a franchise agreement with a franchisee related to unsatisfied performance obligations will be recorded as a franchise acquisition asset and are recognized as cost of sales over the same term as the related performance obligation which is currently 10 years. Revenue from multi-unit development agreements is recognized over the term of the development agreement
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
Based on the 2025 Franchise Disclosure Document, the Beauty Bungalows franchise agreement includes several components related to revenue recognition. When a franchisee purchases a Beauty Bungalows franchise, they are granted the rights to operate in a specific area and use Beauty Bungalows' proprietary methods, techniques, trade dress, trademarks, and logos, which is referred to as "the license." Beauty Bungalows considers this license to be symbolic intellectual property. The revenues related to this license are ongoing royalties, calculated as a fixed percentage of the gross sales of each location. These royalty revenues are intended to support the continued development of the Beauty Bungalows brand and franchise system, as well as to provide ongoing support to franchisees throughout the term of their agreement. The royalties are billed monthly and recognized as revenue when earned. However, for the years ended December 31, 2024, and 2023, the document states that there were no royalties earned.
In addition to royalties, the Beauty Bungalows franchise agreement also involves initial fees. According to the 2025 FDD, revenue from these initial fees is allocated to performance obligations that are distinct from the territory and license rights. These obligations primarily include training services, opening support services, opening marketing assistance, and franchisee acquisition and acceptance. The amount allocated to each of these performance obligations is determined using the expected cost plus a margin approach. Revenue from initial fees is recognized when the performance obligation is satisfied, and control of the goods or service has been transferred to the franchisee.
Performance obligations that are normally satisfied by the opening of the franchised business to the public are determined to be earned during the period from the execution of the contract to the opening of the franchised business, which is generally less than one year. Unearned initial fee revenues from franchisee acquisition and acceptance are recorded as deferred nonrefundable revenue and recognized as revenue over the term of the contract, which is currently 10 years from the date the franchisee opens the franchise business to the public. Incremental costs of obtaining a franchise agreement with a franchisee related to unsatisfied performance obligations are recorded as a franchise acquisition asset and are recognized as cost of sales over the same term as the related performance obligation, which is currently 10 years. Revenue from multi-unit development agreements is recognized over the term of the development agreement. Therefore, the franchise agreement includes components such as the license, royalties, initial fees, training, support, and marketing assistance, each with its own revenue recognition method.