How are initial franchise fees recognized as revenue for Bens Soft Pretzels?
Bens_Soft_Pretzels Franchise · 2025 FDDAnswer from 2025 FDD Document
on by transferring control over a product or service to a customer. The revenue recognition policy for each revenue stream is as follows:
Initial Franchise Fee Revenue – The Company enters into franchise or license agreements that grant franchisees or licensees the right to operate individual Ben's Soft Pretzels locations in exchange for an initial franchise fee. The Company's performance obligations consist of the franchise license which includes the use of the brand, initial services including pre-opening training, and ongoing services including advertising and operational support. Management has determined that these performance obligations are highly interrelated and therefore are not considered to be distinct under ASC 606. As a result, they are accounted for as a single performance obligation which is satisfied by providing the right to use the Company's intellectual property over the initial term of the franchise agreement. Beginning in June 2018, the initial franchise or license agreement is for five years and contains two options to renew for an additional five years each (for a total term of 15 years). Prior to this change in 2018, the initial franchise agreement was for seven years and contained two options to renew for an additional seven years each (for a total term of 21 years). Each option to renew includes an additional fee and is considered a separate performance obligation.
The Company recognizes the initial franchise fee on a straight-line basis using a mid-month convention over the initial term of the franchise or license agreement starting with the opening of the location. The opening is considered to take place when the Company has performed substantially all of the initial services required in the franchise or license agreement and when the franchisee or licensee begins to benefit from the rights included in the franchise or license agreement. Incidental items that are immaterial in the context of the contract are recognized as expense.
Royalty Fee Revenue – Franchises are required to pay the Company a royalty fee based on a percentage of its gross sales, excluding sales tax, pre-approved coupons, and redemption of loyalty rewards. Revenue is recognized on a weekly basis based on the prior week's sales. A receivable is recorded at year end based on average sales per day for the week that spans year end. Royalty fees are due on a weekly basis.
Advertising Fund Fee Revenue – Franchises are also required to pay the Company ad fund fees based on a percentage of its gross sales, excluding sales tax, pre-approved coupons, and redemption of loyalty rewards. In return for these fees, the Company advertises on behalf of the brand as a whole. Franchises can also apply for reimbursement of general advertising expenses that they directly incur. Revenue is recognized on a weekly basis based on the prior week's sales. A receivable is recorded at year end based on average sales per day for the week that spans year end. The adoption of ASU No. 2014-09 did not result in a change to how advertising fee revenue is recognized. Advertising fund fees are due on a weekly basis.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 46)
What This Means (2025 FDD)
According to the 2025 FDD, Bens Soft Pretzels recognizes initial franchise fee revenue on a straight-line basis over the initial term of the franchise agreement, using a mid-month convention, starting with the opening of the location. The opening is considered to occur when Bens Soft Pretzels has performed substantially all of the initial services required by the franchise agreement and when the franchisee begins to benefit from the rights included in the agreement. This means that the revenue isn't fully recognized upfront but is instead spread out over the life of the franchise agreement. For agreements signed since June 2018, the initial term is five years, with options to renew for two additional five-year terms. Before June 2018, the initial term was seven years, with two options to renew for seven years each. Each renewal option includes an additional fee and is treated as a separate performance obligation.
This approach to revenue recognition means that a portion of the initial franchise fee is deferred to future periods. As of December 31, 2024, the deferred portion of initial franchise fee revenue was $332,002; it was $300,294 as of December 31, 2023, and $347,652 as of December 31, 2022. This deferred revenue represents the amount of initial franchise fees that Bens Soft Pretzels has received but not yet recognized as earned revenue on its income statement. The company's performance obligations include the franchise license, pre-opening training, and ongoing support, all of which are considered a single performance obligation satisfied over the term of the agreement.
Franchise fees are typically required to be paid upon signing the franchise agreement. However, Bens Soft Pretzels may allow franchisees to pay over time. In such cases, revenue is still recognized according to the revenue recognition policy, and a receivable is recorded for the unpaid portion. Management has determined that there is not a significant financing component related to these receivables.
For a prospective franchisee, this accounting practice means that Bens Soft Pretzels's reported revenue in any given year does not fully reflect the total initial franchise fees collected that year but rather the portion allocated to that period. This is a common practice in franchising, as it aligns revenue recognition with the ongoing services and support provided to franchisees over the life of the agreement. The deferred revenue balance provides insight into the future revenue stream Bens Soft Pretzels expects to recognize from existing franchise agreements.