Over what period are the 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.
December 31, 2024, 2023, and 2022
NOTE 2 – REVENUE RECOGNITION (CONTINUED)
Revenue recognition (continued)
Other Income – This category of income includes rebates from beverage vendors, design fees, additional training fees, management fees, and registration fees and sponsorships for the owners' convention. Income is recognized based on when the services are provided at an amount expected to be received in exchange for these services. In 2024, the Company signed a 5-year beverage sales and promotion agreement with a beverage provider which includes a rebate based on gallons/cases purchased.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 46)
What This Means (2025 FDD)
According to the 2025 FDD, Bens Soft Pretzels recognizes initial franchise fees as revenue on a straight-line basis over the initial term of the franchise agreement, using a mid-month convention. The revenue recognition begins when the location opens, which is defined as when Bens Soft Pretzels has performed substantially all initial services required by the franchise agreement, and the franchisee starts to benefit from the rights included in the agreement. This means that the revenue is recognized evenly throughout the franchise term rather than all at once. The initial franchise or license agreement, beginning in June 2018, is for five years and contains two options to renew for an additional five years each, totaling a potential term of 15 years. Prior to June 2018, the initial agreement was for seven years with two seven-year renewal options, totaling 21 years. Each renewal option includes an additional fee and is treated as a separate performance obligation.
For a prospective franchisee, this accounting practice means that while the initial franchise fee might be paid upfront or over a period of time, Bens Soft Pretzels does not recognize all of it as revenue immediately. Instead, it is spread out over the term of the agreement. This can affect the company's financial statements, showing a deferred revenue balance that is recognized gradually. As of December 31, 2024, 2023, and 2022, the deferred portion of this revenue totaled $332,002, $300,294, and $347,652, respectively. This deferred revenue is a liability on the balance sheet, representing the services Bens Soft Pretzels owes to franchisees in the future.
It is also noted that Bens Soft Pretzels may allow franchise owners to pay the initial franchise fee over time, typically within twelve months, classifying these amounts as current assets on the balance sheet. No interest is charged on these balances. These franchise fee receivables are stated at the gross receivable amount, less an allowance for credit losses, which management periodically reviews. This practice of allowing payment over time can ease the initial financial burden on new franchisees, but it also introduces a risk of uncollectible accounts, as reflected in the allowance for credit losses. As of December 31, 2024, the balance of the allowance for credit losses was $20,000, while it was $0 in both 2023 and 2022. For the years ended December 31, 2024, 2023, and 2022, credit loss expense related to accounts receivable totaled $28,204, $2,957, and $892, respectively.
This revenue recognition method is compliant with accounting standards (ASC 606), ensuring that Bens Soft Pretzels accurately reflects its financial performance over the life of the franchise agreement. Prospective franchisees should be aware of these accounting practices, as they provide insight into how the franchisor manages and reports its revenue, and how the initial franchise fee contributes to the company's financial health over time.