How does Cinch I.T. account for transactions with related entities under common control?
Cinch_I_T Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company's member controls various related entities with which the Company transacts business. The Company has adopted the accounting alternative offered to private companies for entities under common control. In accordance with this alternative, the Company discloses any transactions with the related entities rather than evaluating the related entities for possible consolidation.
Cinch IT, Inc., a related party, purchased a franchise from the Company. Per the franchise agreement, the franchisee pays a royalty of 5 to 7 percent of its gross sales and an advertising fee of 1.5 percent of its gross sales. During the year ended December 31, 2021, the Company collected royalty fees of $157,390 and advertising fees of $42,983 from the related party. During the year ended December 31, 2020, the Company collected royalty fees of $133,400 and advertising fees of $36,497 from the related party. At December 31, 2021 and 2020, the franchisee owed the Company $38,146 and $17,642, respectively, in advertising and royalties fees, which are included in trade receivables. During the year ended December 31, 2021, the Company also collected annual conference fees of $3,500 from this related party. These fees are included in deferred revenue.
During the year ended December 31, 2021, the Company also collected annual conference fees of $3,200 from a related party. Worcester Interactive LLC. These fees are included in deferred revenue.
Worcester Interactive LLC provides web hosting, maintenance, and advertising services to the Company. The Company had expenses totaling $35,850 and $59,355 for these services during the years ended December 31, 2021 and 2020, respectively.
Source: Item 23 — RECEIPTS (FDD pages 60–269)
What This Means (2024 FDD)
According to the 2024 Cinch I.T. Franchise Disclosure Document, Cinch I.T. has adopted an accounting alternative for private companies regarding entities under common control. Instead of consolidating related entities for accounting purposes, Cinch I.T. discloses any transactions with these related entities. This approach means that the financial statements will show the individual transactions between Cinch I.T. and its related entities, rather than combining the financial results of all the entities as if they were a single unit.
For a prospective franchisee, this disclosure is important because it provides transparency into the financial relationships Cinch I.T. has with other companies under common control. These related-party transactions could include services provided to Cinch I.T., franchise purchases, or advances between the entities. Understanding these transactions can give a franchisee a clearer picture of the franchisor's financial structure and how it interacts with affiliated businesses.
For example, the FDD mentions that Cinch IT, Inc., a related party, purchased a franchise from the company and pays royalties and advertising fees. In 2021, Cinch I.T. collected $157,390 in royalty fees and $42,983 in advertising fees from this related party. In 2020, the royalty fees were $133,400, and the advertising fees were $36,497. Additionally, the related party owed Cinch I.T. $38,146 and $17,642 in advertising and royalties fees at the end of 2021 and 2020, respectively. Cinch I.T. also collected annual conference fees from related parties, such as $3,500 from Cinch IT, Inc. and $3,200 from Worcester Interactive LLC in 2021. Worcester Interactive LLC also provides web hosting, maintenance, and advertising services to Cinch I.T., with expenses totaling $35,850 in 2021 and $59,355 in 2020. These specific disclosures help potential franchisees understand the types and amounts of transactions Cinch I.T. engages in with its related entities.