What factors does Checkersrallys evaluate when determining the collectability of a debt?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
Receivables consist primarily of franchise royalties, franchise fees, sublease rents, delivery sales receivables, and retail royalties. These amounts 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, when determining the collectability of accounts receivable, Checkersrallys evaluates several factors. These include the debtor's financial condition, historical experience with the debtor, and the value of any pledged security interest. Accounts receivable primarily consist of franchise royalties, franchise fees, sublease rents, delivery sales receivables, and retail royalties.
Checkersrallys establishes reserves for potential credit losses using the specific identification method, which relies on the company's best estimate of the collectible balance. The company has historically experienced a high rate of collection due to the franchise agreements that provide remedies in the event of a franchisee's default on outstanding balances. These remedies include a security interest in the assets of the business when a sublease is in place or a personal guarantee from the franchisee.
For notes receivable, which include funds extended to franchisees for restaurant sales and repayment terms on past due rents and royalties, Checkersrallys establishes specific allowances when collection is no longer deemed likely. If the notes are secured, the restaurant's assets often act as collateral, giving Checkersrallys the option to acquire the restaurant assets in the event of default. Interest on outstanding notes is charged according to the terms of the promissory note and is recognized over the term of the note.
Prospective franchisees should understand that Checkersrallys actively monitors franchisees' compliance with the franchise agreement and sublease terms. If a franchisee is not in compliance, they are placed in default status, and Checkersrallys closely monitors royalties accruing on franchisee sales to determine if collectability is reasonably assured. If Checkersrallys 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.