Under what circumstances does Checkers establish specific allowances for notes receivable from franchisees?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
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, 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' 2025 Franchise Disclosure Document, specific allowances for notes receivable from franchisees are established when collection is no longer deemed likely. These notes receivable often arise from funds Checkers extends to franchisees for the sale of restaurants, as well as for repayment terms on past due rents and royalties. The assets of the associated restaurant may act as collateral for secured notes. If a franchisee defaults, Checkers has the option to acquire the restaurant assets, with the balance of the outstanding notes included in the consideration provided by Checkers. However, not all notes are collateralized.
When determining the allowance for credit losses on accounts receivable, Checkers evaluates the debtor's financial condition, historical experience with the debtor, and the pledged security interest value, if any. Checkers also monitors whether franchisees comply with the terms of the franchise agreement and sublease, if applicable. Franchisees not in compliance are placed in default status, leading to close monitoring of 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. Accounts and notes receivable are written off when deemed uncollectible.
For a prospective franchisee, this means that if you receive funds from Checkers for the sale of a restaurant or have repayment terms for rents and royalties, Checkers will monitor your ability to repay those funds. If your financial situation deteriorates to the point where repayment is unlikely, Checkers will establish an allowance against the notes receivable. If you default on a secured note, Checkers may take possession of the restaurant assets. It is important to understand the terms of any promissory notes and the conditions under which Checkers may take action to recover outstanding balances.