How does Beggars Pizza recognize revenue from pre-opening services provided to franchisees?
Beggars_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company has obligations to provide franchisees with the franchise rights to operate a Beggars Pizza store, and to assist with site selection, training, preparing and distributing operating manuals and menus, and with conducting inspections under their quality control program. The Company has elected the practical expedient to account for the pre-opening services provided to franchisees as distinct from the franchise license and recognize pre-opening services as a single performance obligation. Therefore, the initial franchise fee for each agreement is allocated to each individual franchise and recognized at a point in time when a new franchise location opens. Renewal fees are recognized at a point in time when renewal performance obligations are completed. Income for royalties are recognized over the term of the respective franchise agreement as the underlying sales occur.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 39)
What This Means (2025 FDD)
According to Beggars Pizza's 2025 Franchise Disclosure Document, the company recognizes revenue from pre-opening services as a single performance obligation, distinct from the franchise license itself. These pre-opening services include assisting with site selection, training, preparing and distributing operating manuals and menus, and conducting inspections under their quality control program.
Beggars Pizza allocates the initial franchise fee to each individual franchise agreement. The revenue recognition occurs at a specific point in time: when the new franchise location officially opens. This means that while the initial franchise fee is due upon signing the agreement, Beggars Pizza does not recognize it as revenue until the franchisee commences operations.
This accounting practice has implications for prospective franchisees. While the initial fee is nonrefundable, its recognition as revenue is tied to the opening of the store. This aligns Beggars Pizza's revenue recognition with the franchisee's actual commencement of business, a common practice that ensures revenue is recognized when the service has been substantially provided. Renewal fees are treated similarly, being recognized when the services related to the renewal are completed.
In addition, Beggars Pizza's revenue includes royalties, which are recognized over the term of the franchise agreement as the underlying sales occur. The transaction price, which includes both fixed and variable components, is determined based on customary business practices and the terms of the franchise agreement. Variable consideration, such as royalties, is recognized based on the actual amounts incurred each month, reflecting the ongoing nature of the franchise relationship.