How does Chocolate Bash estimate the stand-alone selling price of pre-opening activities?

According to Chocolate Bash's 2024 Franchise Disclosure Document, the company estimates the stand-alone selling price of pre-opening activities using an adjusted market assessment approach. This involves allocating the initial franchise fees and any fixed consideration under the franchise agreement to the stand-alone selling price of training services that are not brand specific. Any remaining amount after this allocation is then assigned to the right to access Chocolate Bash's intellectual property.

The portion of pre-opening activities that are not brand specific are considered distinct because they provide general business information that benefits the franchisee and are not highly interrelated with accessing Chocolate Bash's intellectual property. The consideration allocated to these non-brand-specific pre-opening activities is recognized ratably as the services are rendered. For pre-opening activities included under Accounting Standards Update (ASU) to ASC 606, Franchisors—'Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient', the consideration is recognized when the related services have been rendered.

In simpler terms, Chocolate Bash separates the initial franchise fee into components: training and access to their brand's intellectual property. They use a market assessment to determine the value of the training provided. The remaining portion of the fee is then attributed to the franchisee's right to use the Chocolate Bash brand and system. This approach ensures that revenue is recognized appropriately as Chocolate Bash fulfills its obligations to the franchisee, both in terms of initial training and ongoing access to their brand and resources.