Over what period does Carbones Pizzeria recognize deferred franchise revenue?
Carbones_Pizzeria Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchise fees are recognized as deferred revenue at the time a franchise agreement is executed or when a location commences operations. The deferred revenue is then recognized as revenue pro-rata over the term of the agreement. For area development agreements, the development fees are recognized as deferred revenue at the time an area development agreement is executed. The deferred revenue is recognized pro-rata over the term of the agreement or when the required number of franchises in the area development agreement are satisfied, whichever occurs earlier.
Deferred commissions for sales of franchises are recorded at the time of sale and recognized as commission expense over the term of the franchise agreement.
Royalties
The Company receives a service fee based on a percentage of sales each week from the franchised locations as royalties. Revenue from royalties is recognized each week based on a percentage of reported franchisee sales.
Initial and Renewal Franchise Fees
When an individual franchise is sold, the Company agrees to provide certain services to the franchisee. Generally, these services include assistance in site selection, training personnel, implementation of an accounting system, and design of a quality control program. The Company's initial and renewal franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement.
Source: Item 22 — CONTRACTS (FDD page 30)
What This Means (2025 FDD)
According to Carbones Pizzeria's 2025 Franchise Disclosure Document, initial and renewal franchise fees are recognized as deferred revenue when the franchise agreement is executed or when the location begins operations. This deferred revenue is then recognized pro-rata over the term of the agreement. For area development agreements, the development fees are recognized as deferred revenue at the time the area development agreement is executed. This revenue is recognized pro-rata over the term of the agreement or when the required number of franchises in the area development agreement are satisfied, whichever occurs earlier.
For a Carbones Pizzeria franchisee, this means that the initial franchise fee you pay isn't immediately recognized as revenue by the company. Instead, it's spread out over the entire term of your franchise agreement. This accounting practice reflects the ongoing services and support Carbones Pizzeria provides throughout the franchise term, such as site selection assistance, training, and quality control program implementation.
The standard contract term for an initial Carbones Pizzeria franchise agreement is 10 years, commencing on the earlier of the date the restaurant opens or twelve months following the date the franchise agreement was signed. Therefore, the initial franchise fee is recognized as revenue over this 10-year period. Similarly, renewal franchise fees are also recognized over a 10-year period, corresponding to the term of the renewal agreement.
This revenue recognition method is common in the franchise industry, as it aligns the recognition of revenue with the delivery of ongoing services and the right to use the Carbones Pizzeria brand and system. Prospective franchisees should be aware of this accounting practice, as it impacts the franchisor's financial statements and can provide insights into the long-term relationship between the franchisee and Carbones Pizzeria.