Under what circumstances are Carls franchise fees forfeited and recognized as revenue?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Franchise development and commitment fees are deferred when received, allocated to each agreed upon restaurant, and recognized as revenue over the contractual term of each respective franchise agreement, once the restaurant has opened. Initial franchise fees, training fees, renewal fees and transfer fees are recognized as revenue over the contractual term of the franchise agreements, once the restaurant has opened. Upfront franchise fees are typically billed and paid when a new franchise agreement becomes effective or when an existing agreement is transferred to another franchisee. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Further, franchise fees are forfeited and recognized as revenue upon the termination of the related commitments to open new franchised restaurants, the franchised restaurants closing prior to the end of the contractual agreement or the franchised restaurants being acquired by the Company.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, the franchise fees are typically billed and paid when a new franchise agreement becomes effective or when an existing agreement is transferred to another franchisee. Carls considers these franchise fees highly dependent upon and interrelated with the franchise right granted in the franchise agreement.
However, Carls recognizes these franchise fees as revenue under specific forfeiture conditions. This occurs upon the termination of commitments to open new franchised restaurants. This means if a franchisee agrees to open multiple locations but fails to meet this obligation, the initial fees paid for those un-opened locations are then recognized as revenue by Carls.
Additionally, franchise fees are recognized as revenue if franchised restaurants close before the end of their contractual agreement. In this case, Carls recognizes the remaining unearned portion of the franchise fee. Lastly, if Carls acquires a franchised restaurant, any unearned franchise fees associated with that location are immediately recognized as revenue. These policies ensure that Carls recognizes revenue when the franchisee's rights or obligations are terminated, thereby aligning revenue recognition with the actual services provided and rights granted.