How does Beauty Bungalows determine the contract price for each performance obligation?
Beauty_Bungalows Franchise · 2025 FDDAnswer from 2025 FDD Document
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Beauty Bungalows' 2025 Franchise Disclosure Document, the amount allocated to each identified performance obligation is determined using the expected cost plus a margin approach. This means that Beauty Bungalows calculates the cost of fulfilling each obligation, such as training services or opening support, and then adds a margin to that cost to determine the price.
For a prospective franchisee, this means that the fees they pay for services like training and support are based on Beauty Bungalows' costs plus a profit margin. This approach is common in franchising, as it allows the franchisor to cover their expenses and generate revenue from the services they provide to franchisees.
It's important to note that the initial franchise fee is allocated to performance obligations that are distinct from the territory and license rights. These obligations include training services, opening support services, opening marketing assistance, and franchisee acquisition and acceptance. The revenue from initial fees is recognized when the performance obligation is satisfied, meaning when Beauty Bungalows has delivered the service to the franchisee. 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.
This revenue recognition method ensures that Beauty Bungalows recognizes revenue when it has fulfilled its obligations to the franchisee. Additionally, 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.