How are upfront fees paid by Chatime franchisees for development rights recognized as revenue?

According to Chatime's 2025 Franchise Disclosure Document, upfront fees paid by franchisees for development rights are not immediately recognized as revenue. Instead, these fees are deferred and then apportioned to each individual franchise agreement that the franchisee signs. This approach is taken because the development rights are considered an integral part of the franchise agreements themselves, rather than a separate, distinct service.

Once the upfront fees are apportioned, the revenue recognition occurs in the same manner as initial and renewal franchise fees. This means that the revenue is recognized on a straight-line basis over the term of the respective franchise agreement. For example, if a franchise agreement has a term of ten years, Chatime would recognize one-tenth of the apportioned fee as revenue each year.

This accounting method ensures that Chatime recognizes revenue in alignment with the actual benefit the franchisee receives over the life of the agreement. By deferring the upfront fees and recognizing them gradually, Chatime avoids recognizing a large sum of revenue upfront that isn't yet earned. This approach is a common practice in franchising, as it accurately reflects the ongoing nature of the franchise relationship and the continuous support and intellectual property access provided to franchisees.