How does Checkersrallys recognize franchise fees, such as the initial franchise fee, for revenue purposes?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
- Franchise restaurant royalties are earned as the franchise delivers food to their customer or to a third-party delivery partner. The Company recognizes the royalty revenue in the period in which the franchise sales occur over the contract term of the franchise agreement. The Company generally bills royalties bi-monthly or bi-weekly 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.
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 aligns with the satisfaction of the performance obligation to grant the franchise right, which occurs over each day of the contract term. These franchise fees may vary based on qualification under certain development incentive programs.
Specifically, Checkersrallys records franchise fees as deferred revenue when they are received. This means that the revenue is not immediately recognized as income. Instead, it is recognized gradually over the contractual term of the franchise agreement, but only once the restaurant has opened. Similarly, area development fees are also deferred when received. These fees are allocated to each agreed-upon restaurant and recognized as revenue over the contractual term of each respective franchise agreement, again, only after the restaurant has opened.
In practice, this means that Checkersrallys does not recognize the entire franchise fee as revenue upfront. Instead, it spreads the revenue recognition over the life of the franchise agreement. This accounting method provides a more accurate reflection of when Checkersrallys earns the revenue, as it corresponds to the franchisee's ongoing right to operate under the Checkersrallys brand and system. This approach is common in the franchise industry, as it aligns revenue recognition with the continuous support and brand usage provided to the franchisee.