How does Bens Soft Pretzels limit concentrations of credit risk with respect to trade receivables?

According to the 2025 FDD, Bens Soft Pretzels limits its concentrations of credit risk regarding trade receivables through the large number of franchise owners and their geographical dispersion. This means that Bens Soft Pretzels is not overly reliant on a small number of franchisees for its revenue from royalties, ad fund fees, and gift card sales, which are the primary components of the company's accounts receivable. If one franchisee or a small group of franchisees were to face financial difficulties and be unable to pay, the impact on Bens Soft Pretzels' overall financial health would be limited because the risk is spread across a larger base of operators.

This approach is a common risk management strategy in franchising. By expanding the franchise network across different regions, Bens Soft Pretzels reduces its exposure to local economic downturns or specific market conditions that might adversely affect a cluster of franchisees in one area. The FDD also mentions that management periodically reviews the accounts receivables aging and records an allowance for credit losses for any accounts that are expected to be uncollectible based on current economic conditions, history with the franchise owner, and overall performance of its bakeries. Once all attempts to collect have been exhausted, Management writes the balance off against the allowance.

For a prospective franchisee, this diversification offers a degree of stability. It suggests that the financial health of Bens Soft Pretzels is not tied to the performance of just a few locations, which can be reassuring. However, franchisees should still conduct their own due diligence to assess the overall financial stability of the franchisor and understand the potential risks associated with the franchise system. It is also important to note that while the company attempts to mitigate credit risk through diversification, there is still a risk of credit losses. As of December 31, 2024, the allowance for credit losses was $20,000.

In addition to trade receivables, Bens Soft Pretzels also addresses credit risk related to franchise fees receivable by extending credit to only a small group of franchise owners. This more selective approach to extending credit for franchise fees further minimizes potential losses. The company also has an allowance for credit losses for franchise fees receivable. As of December 31, 2024, 2023, and 2022 the allowance for credit losses was $0. For the years ended December 31, 2024, 2023, and 2022 credit loss expense related to franchise fees totaled $8,500, $0 and $0, respectively.