How does Checkers determine the collectability of accounts when establishing reserves for credit losses?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
d to certain letters of credit and debt arrangements and are presented within cash and cash equivalents on the consolidated balance sheets. Restricted cash balances as of January 1, 2024 (Successor) and January 2, 2023 (Predecessor) were $2.6 million and $0.4 million respectively.
Accounts and Notes Receivable, Net
Receivables consist primarily of royalties, rents, franchise fees and notes due from franchisees and are recorded net of an allowance for credit losses. Franchisee related accounts receivable are due within 10 days of billing and in some instances we draw the funds directly from the franchisee's bank account on a predetermined day. Although the Company maintains an allowance for credit loss, the majority of the balance relates to specific accounts where collection is not expected. The reserves are established using the specific identification method based on our best estimate of the collectible balance. When determining collectability, we evaluate the debtor's financial condition, the historical experience with the debtor, and the pledged security interest value, if any. The Company has traditionally experienced a high rate of collection as the franchise agreements frequently provide remedy to the Company in the event of the franchisee's default on outstanding balances through a security interest in the assets of the business when a sublease is in place or through a personal guarantee of the franchisee.
Notes receivable consist of funds extended to franchisees as consideration for the sale of restaurants and repayment terms on past due rents and royalties. Specific allowances are established when collection is no longer deemed likely. With respect to secured notes, the assets of the associated restaurant often act as collateral. In the event of default, the Company has the option to acquire the restaurant assets, with the balance of the outstanding notes included in the consideration provided by the Company. However,
(Tabular Dollars in Thousands, Except Share and per Share Data)
not all notes are collateralized. Interest on outstanding notes is charged according to the terms of the promissory note and is recognized on a period basis over the term of the note.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers's 2025 Franchise Disclosure Document, when determining the collectability of accounts, Checkers evaluates several factors. These include the financial condition of the debtor (the franchisee in this case), Checkers's historical experience with that particular debtor, and the value of any pledged security interest. This process is part of establishing reserves for credit losses, which are determined using the specific identification method based on Checkers's best estimate of the collectible balance.
This approach is important for prospective franchisees because it highlights how Checkers manages financial risk associated with franchisee accounts receivable, which primarily consist of royalties, rents, and franchise fees. Checkers aims to mitigate potential losses through a combination of direct bank drafts, security interests in business assets (when a sublease is in place), and personal guarantees from franchisees. This suggests that Checkers actively monitors and manages franchisee accounts to ensure timely payments and minimize bad debt.
The FDD also notes that Checkers has historically experienced a high rate of collection. This is attributed to the remedies available to Checkers in the event of a franchisee's default on outstanding balances, such as security interests and personal guarantees. This indicates that Checkers takes proactive measures to secure its financial interests and has been generally successful in collecting outstanding debts from franchisees. Franchisee related accounts receivable are due within 10 days of billing, and in some instances Checkers directly withdraws funds from the franchisee's bank account on a predetermined day.
Furthermore, Checkers monitors franchisees to ensure they comply with the terms of the franchise agreement and sublease, if applicable. If a franchisee fails to comply, they are placed in default status, and Checkers closely monitors the royalties accruing on franchisee sales to determine if collectability is reasonably assured. If Checkers determines that certain amounts are not probable of collection, the related royalty revenue is not recognized, and the accounts receivable are written off when deemed uncollectible. This detailed approach to managing accounts receivable and credit losses can provide a level of financial stability for Checkers and its franchisees.