When does Chesters recognize the initial franchise fees as earned revenue from the sale of an individual franchise location to a third party?

According to Chesters's 2025 Franchise Disclosure Document, initial franchise fees from the sale of an individual franchise location to a third party are initially considered "unearned franchise fees." Chesters recognizes these fees as earned revenue upon the opening of the franchise location. This accounting practice means that Chesters does not record the franchise fee as income until the franchisee commences operations.

For a prospective Chesters franchisee, this policy indicates that the initial franchise fee paid is not immediately recognized as revenue by Chesters. Instead, it is treated as a liability (unearned revenue) until the store opens. This is a common practice in franchising, as the franchisor's performance obligation (i.e., providing the franchise and related services) is not fully satisfied until the franchisee is up and running.

This revenue recognition method provides a degree of assurance to the franchisee. Since Chesters doesn't recognize the fee as earned until the opening, there is an incentive for Chesters to support the franchisee in successfully launching their location. It also aligns the revenue recognition with the actual delivery of the franchise benefits and services. Franchise fees for the years ended December 31, 2023 and 2022 was $286,274 and $254,500, respectively, and is included in sales in the accompanying statements of income and members' equity.