How does Cinch I.T. account for revenue from franchise fees?
Cinch_I_T Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's policy is to prepare its financial statements on the accrual basis of accounting, consequently, certain revenues are recognized when earned rather than when cash is received, and certain expenses are recognized when the obligation is incurred rather than when the cash is disbursed.
- 4.2 You shall pay to Us an initial franchise fee ("Initial Franchise Fee") of Fifteen Thousand Dollars ($15,000.00) for the first CINCH I.T.
Franchise Agreement and a development fee ("Development Fee") of ________ Dollars ($____________) for each additional CINCH I.T.
Franchised Business to be developed under this Agreement.
The Initial Franchise Fee and Development Fee are due in full upon the execution of this Agreement.
All amounts collected shall be deemed fully earned immediately upon receipt and shall be non-refundable, regardless of whether You open any of the CINCH I.T.
Franchised Businesses You are obligated to open in the Development Area.
We will credit each Development Fee paid as full payment of the initial franchise fee due for each subsequent franchise to be opened under this Agreement.
Source: Item 23 — RECEIPTS (FDD pages 60–269)
What This Means (2024 FDD)
According to Cinch I.T.'s 2024 Franchise Disclosure Document, the company uses the accrual basis of accounting. This means that Cinch I.T. recognizes revenues when they are earned, rather than when cash is received, and expenses are recognized when the obligation is incurred, rather than when cash is disbursed. This is a standard accounting practice, ensuring that financial statements accurately reflect the company's financial performance during a specific period.
Specifically, the FDD states that all amounts collected from initial franchise fees and development fees are deemed fully earned immediately upon receipt and are non-refundable. For a single Cinch I.T. franchise, the initial franchise fee is $15,000. If a franchisee purchases the rights to develop multiple Cinch I.T. locations, they must also pay a development fee for each additional franchise. These development fees will be credited as full payment of the initial franchise fee for each subsequent franchise opened under the agreement.
This accounting policy has significant implications for prospective franchisees. Because the fees are deemed fully earned and non-refundable upon receipt, Cinch I.T. recognizes the revenue immediately. This means that even if the franchisee does not open any of the Cinch I.T. Franchised Businesses they are obligated to open in the Development Area, Cinch I.T. still recognizes the revenue and the franchisee will not receive a refund. Franchisees should carefully consider their ability to fulfill their development obligations before entering into a multi-unit development agreement with Cinch I.T.