What are the five steps Better Blend uses to recognize revenue?

According to Better Blend's 2024 Franchise Disclosure Document, the company recognizes revenue based on a five-step process. These steps are: identifying a contract with a client, identifying the performance obligations within that contract, determining the transaction price, allocating the transaction price to each performance obligation, and confirming that Better Blend has satisfied the applicable performance obligation. This approach aligns with standard accounting practices that ensure revenue is recognized only when it has been earned and can be reliably measured.

For a prospective Better Blend franchisee, understanding these revenue recognition principles is crucial because it dictates how and when Better Blend records its income from franchise fees, royalties, and other sources. For example, initial franchise fees and development fees are recognized over the term of the franchise agreement, reflecting the ongoing support and brand access provided to the franchisee. This means that Better Blend doesn't immediately recognize all upfront fees as revenue but spreads it out over the life of the agreement.

This deferred recognition of initial fees is a common practice in franchising, as it reflects the franchisor's continuing obligations to support the franchisee. The FDD also mentions that Better Blend had approximately $145,000 of contract liabilities as of December 31, 2022, which represents unearned revenue from the sale of new franchises and approval of new franchisee locations. This deferred revenue will be recognized as the company fulfills its obligations over time.

By understanding these accounting policies, potential franchisees can better interpret Better Blend's financial statements and assess the company's financial health. It also provides insight into how Better Blend manages its revenue streams and ensures compliance with accounting standards.