Under what conditions are revenues recorded for Better Blend?
Better_Blend Franchise · 2024 FDDAnswer from 2024 FDD Document
December 31, 2023 were not material to the financial statements.
Revenue Recognition
Revenues are recorded when: (i) a contract with a client has been identified, (ii) the performance obligation(s) in the contract have been identified, (iii) the transaction price has been determined, (iv) the transaction price has been allocated to each performance obligation in the contract, and (v) the Company has satisfied the applicable performance obligation.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
The Company's revenue consists of fees from franchised restaurants operated by conventional franchisees. Revenue from conventional franchised restaurants include initial franchise fees, royalties based on percent of sales, marketing fees based on percent of sales, and development fees for locations the franchisee opens in addition to the initial location.
Royalties are collected on a weekly basis and are based on certain percentage as specified on the franchise agreement. Marketing fees are based on up to 1% of gross revenue. The marketing fund is used for marketing expenses related to maximizing public recognition of the Company's brand and marketing fund.
The initial franchise fees collected are determined on a franchisee-by-franchisee basis. The Company had ten franchisees under contract and four were operational as of December 31, 2023.
The Company had no contract assets and approximately $145,000 of contract liabilities as of December 31, 2022.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 43)
What This Means (2024 FDD)
According to Better Blend's 2024 Franchise Disclosure Document, the company records revenues when specific conditions are met. These conditions include: first, a contract with a client must be identified; second, the performance obligations within the contract must be clearly defined; third, the transaction price must be determined; fourth, the transaction price must be allocated to each performance obligation; and fifth, Better Blend must have satisfied the applicable performance obligation. This approach aligns with generally accepted accounting principles (GAAP).
Better Blend's revenue primarily comes from fees associated with franchised restaurants operated by conventional franchisees. These revenue streams include initial franchise fees, royalties based on a percentage of sales, marketing fees also based on a percentage of sales (up to 1% of gross revenue), and development fees for each additional location a franchisee opens beyond their initial one. Royalties are collected weekly, based on percentages specified in the franchise agreement. Marketing fees contribute to a marketing fund used to enhance public recognition of the Better Blend brand.
Furthermore, the FDD states that Better Blend recognizes franchise fee and development fee revenues when performance obligations are satisfied. Because management has determined that the performance obligations related to franchise fees are satisfied over time, revenue is recognized over the term of the franchise agreement. As a result, a portion of these fees may be recorded as deferred revenue, representing unearned revenue from the sale of new franchises and the approval of new franchisee locations, until the obligations are fully met. For example, deferred revenue was $145,000 as of December 31, 2022.
For a prospective franchisee, understanding these revenue recognition policies is crucial. It clarifies when Better Blend recognizes income from various fees and how deferred revenue impacts the company's financial statements. This information can help franchisees assess the financial health and stability of Better Blend, as well as understand how the franchisor manages its revenue streams and obligations.