How does Best Brains recognize revenue from the sale of an individual franchise?
Best_Brains Franchise · 2025 FDDAnswer from 2025 FDD Document
accounts payable and credit cards payable in the balance sheet approximates their fair value.
Deferred Franchising Fee Revenue
Deferred franchising fee revenue of $514,081 and $136,168 as of December 31, 2024, and 2023, respectively, represents the franchise fee received in advance. Franchising fee revenue is amortized over a period of 5 years from the start of the franchisee location.
NOTES TO FINANCIAL STATEMENTS
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) or Accounting Standards Codification 606 ("ASC606").
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 42)
What This Means (2025 FDD)
According to Best Brains' 2025 Franchise Disclosure Document, the company recognizes revenue from individual franchise sales as performance obligations are satisfied. The initial franchise fees, collected upfront, are amortized over the life of the franchise agreement, which is generally five years. This means that Best Brains does not recognize the entire franchise fee as revenue immediately upon receipt but instead spreads it out over the term of the agreement. This accounting practice complies with Accounting Standards Codification 606.
For a prospective Best Brains franchisee, this means that the initial franchise fee paid to Best Brains will be recognized by Best Brains as revenue gradually over the first five years of the franchise operation. This approach aligns the revenue recognition with the services and support Best Brains provides to the franchisee during that period. The FDD mentions that Best Brains adopted the accounting standard update 2020-05 effective January 1, 2019, retrospectively.
This revenue recognition method is a common practice in the franchise industry, as it reflects the ongoing relationship and obligations between the franchisor and franchisee. The deferred franchising fee revenue was $514,081 and $136,168 as of December 31, 2024, and 2023, respectively, representing franchise fees received in advance. This deferred revenue is then recognized over the five-year period.
It's important for potential franchisees to understand how franchise fees are recognized as revenue, as it can provide insight into the franchisor's financial stability and accounting practices. Additionally, understanding the deferred revenue balance can offer a glimpse into the future revenue stream for Best Brains based on franchise fees already collected but not yet recognized.