Under what conditions does Cilantro Taco Grill recognize initial franchise fees as revenue?
Cilantro_Taco_Grill Franchise · 2024 FDDAnswer from 2024 FDD Document
on to withdraw from a marketing area or the Territory in which Franchisee's Franchised Business is located.
6. FEES.
- 6.1 Initial Franchise and Royalty Fee. As part of the consideration for the right to operate the Franchise granted herein, Franchisee shall pay to Franchisor the following fees:
- 6.1.1 Initial Franchise Fee. Franchisee acknowledges and agrees that the grant of this Franchise and the rights and obligations of the parties under this Agreement constitute the sole and only consideration for the initial franchise fee of Thirty-Five Thousand Dollars ($35,000.00) (the "Initial Fee"). The Initial Fee is fully earned at the time this Franchise Agreement is signed and is not refundable under any circumstances. Franchisee shall pay the full amount of the Initial Fee to Franchisor upon Franchisee's execution of this Agreement. In the event this Agreement is for a restaurant being developed pursuant to a multi-unit operator agreement, then the Initial Franchise Fee shall be reduced by any amount applied by Franchisor from the development fee paid by Franchisee pursuant to the terms of such multi-unit operator agreement. Any remain
Source: Item 23 — RECEIPT (FDD pages 52–208)
What This Means (2024 FDD)
According to Cilantro Taco Grill's 2024 Franchise Disclosure Document, the initial franchise fee is considered fully earned upon the signing of the Franchise Agreement. The document specifies that the initial franchise fee of $35,000 is non-refundable under any circumstances once the agreement is executed. This means that Cilantro Taco Grill recognizes this fee as revenue at the point of signing, regardless of whether the franchisee's restaurant is yet operational.
For prospective franchisees, this policy has important implications. Once you sign the Franchise Agreement, Cilantro Taco Grill has earned the $35,000 initial fee, and you will not receive a refund, even if you later decide not to open the franchise or are unable to do so. This is a standard practice in franchising, as the initial fee compensates the franchisor for granting the franchise rights, providing initial training, and assisting with the setup of the business.
However, the FDD also mentions an exception for multi-unit operator agreements. If the franchise is being developed under a multi-unit agreement, the initial franchise fee may be reduced by any amount applied from the development fee already paid by the franchisee, according to the terms of the multi-unit operator agreement. Any remaining portion of the initial franchise fee would then be due as specified in that agreement. This is an important consideration for those planning to open multiple Cilantro Taco Grill locations, as the structure of fees and their recognition as revenue may differ slightly.