Over what period does Checkersrallys satisfy the franchise fees performance obligation?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
y to franchise customers and the payment is due within 10 days of the billing. See the "accounts and notes receivable" below for additional information on franchise royalty payments. Royalty rates are generally 4% of net sales but the rates may vary based on restaurants qualifying under certain development or reimaging programs.
- Franchise fees including the initial franchise fee, transfer fees, area development fees, and renewal fees are recognized over the term of the franchise contract as the performance obligation to grant the franchise right is satisfied over each day of the contract term. Franchise fees may vary based on qualification under certain development incentive programs.
The Company earns retail royalty fees based on a contract for the sale of licensed products, including the Famous Seasoned Fries© at retail outlets. The performance obligation is satisfied as sales in the retail outlets are made, royalties are payable monthly within 30 days, and vary with retail sales volume.
(Tabular Dollars in Thousands, Except Share and per Share Data)
The Company is the sublessor on certain lease agreements which are generally for franchise restaurants.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, franchise fees, including initial franchise fees, transfer fees, area development fees, and renewal fees, are recognized over the term of the franchise contract. This is because the performance obligation to grant the franchise right is satisfied over each day of the contract term. These franchise fees may vary based on qualification under certain development incentive programs.
In simpler terms, Checkersrallys doesn't recognize all the franchise fees as revenue immediately. Instead, they spread the recognition of revenue over the entire length of the franchise agreement. This accounting practice aligns the revenue recognition with the period during which the franchisee benefits from the franchise rights.
For a prospective franchisee, this means that the initial franchise fee you pay to Checkersrallys is not immediately recognized as income by them. Instead, it's recognized gradually over the term of your franchise agreement. This approach is common in franchising, as it reflects the ongoing support and brand usage provided by the franchisor throughout the franchise term. The franchise agreement generally provides for a 20-year term and a 10-year renewal subject to certain conditions.
This accounting treatment also has implications for Checkersrallys's financial statements, as the unearned portion of these fees is recorded as deferred revenue on their balance sheet. The deferred revenue is then recognized as earned revenue over the life of the franchise agreement. Franchise fees are recorded as deferred revenue when received and recognized as revenue over the contractual term of the franchise agreements once the restaurant has opened. Area development 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.