How does Big Apple Bagels recognize revenue allocated to franchise rights and ongoing services?
Big_Apple_Bagels Franchise · 2025 FDDAnswer from 2025 FDD Document
Under the terms of our franchise agreements, the Company typically promises to provide franchise rights, pre-opening services such as blueprints, operational materials, planning and functional training courses, and ongoing services, such as management of the marketing fund. The Company considers certain pre-opening activities and the franchise rights and related ongoing services to represent two separate performance obligations. The franchise fee revenue has been allocated to the two separate performance obligations using a residual approach. The Company has estimated the value of performance obligations related to certain preopening activities deemed to be distinct based on cost plus an applicable margin, and assigned the remaining amount of the initial franchise fee to the franchise rights and ongoing services. Revenue allocated to preopening activities is recognized when (or as) these services are performed. Revenue allocated to franchise rights and ongoing services is deferred until the store opens, and recognized on a straight-line basis over the duration of the agreement, as this ensures that revenue recognition aligns with the customer's access to the franchise right.
Source: Item 23 — RECEIPTS (FDD pages 87–319)
What This Means (2025 FDD)
According to Big Apple Bagels' 2025 Franchise Disclosure Document, the company recognizes revenue allocated to franchise rights and ongoing services by deferring it until the store opens. After the store opens, the revenue is recognized on a straight-line basis over the duration of the franchise agreement. Big Apple Bagels believes this method aligns revenue recognition with the franchisee's access to the franchise right.
Big Apple Bagels franchise agreements typically require franchisees to pay an initial, non-refundable fee before opening their location and continuing royalty fees weekly based on a percentage of net sales. The initial term of these franchise agreements is usually 10 years. With Big Apple Bagels' approval, a franchisee can generally renew the franchise agreement upon its expiration or transfer it to a new or existing franchisee, which typically involves a transfer fee paid by the current owner, terminating the existing agreement and instating a new agreement with the new franchisee without requiring an additional franchise fee.
Under the terms of the franchise agreement, Big Apple Bagels promises to provide franchise rights, pre-opening services (such as blueprints, operational materials, planning, and functional training courses), and ongoing services like managing the marketing fund. Big Apple Bagels considers certain pre-opening activities and the franchise rights and related ongoing services as two separate performance obligations. The franchise fee revenue is allocated to these separate performance obligations using a residual approach, where the value of pre-opening activities is estimated based on cost plus an applicable margin, and the remaining amount of the initial franchise fee is assigned to the franchise rights and ongoing services. Revenue allocated to pre-opening activities is recognized when these services are performed.