How are royalties and advertising fees recognized by Cinch I.T.?
Cinch_I_T Franchise · 2024 FDDAnswer from 2024 FDD Document
r interest. Since management does not expect the entire amount to be repaid in the next twelve months, the balance is classified as long-term on the balance sheets.
Revenues
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, 2023, the Company collected royalty fees of $184,919 and advertising fees of $56,326 from the related party. During the year ended December 31, 2022, the Company collected royalty fees of $187,724 and advertising fees of $56,326 from the related party. At December 31, 2023, the franchisee owed the company $22,191 in advertising and royalty fees, which are included in trade receivables.
During the year ended December 31, 2022, the Company also collected annual conference fees of $1,400 from this related party. The fees are included in deferred revenue in 2022 and have been recognized as annual conference revenue in 2023.
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 recognizes royalty and advertising fees as revenue. Specifically, Cinch I.T., Inc., a related party, purchased a franchise from the company and, according to the franchise agreement, pays a royalty of 5 to 7 percent of its gross sales, along with an advertising fee of 1.5 percent of its gross sales.
The FDD indicates that during the year ended December 31, 2021, Cinch I.T. collected royalty fees of $157,390 and advertising fees of $42,983 from this related party. In the prior year, ending December 31, 2020, the company collected $133,400 in royalty fees and $36,497 in advertising fees from the related party. These figures demonstrate the actual revenue recognized from these fees.
Additionally, the FDD notes that at the end of 2021 and 2020, the related-party franchisee owed the company $38,146 and $17,642, respectively, in advertising and royalties fees. These amounts are included in trade receivables, indicating that Cinch I.T. recognizes these fees as assets (accounts receivable) even before they are collected in cash. The company also collected annual conference fees of $3,500 and $3,200 from related parties, which are included in deferred revenue, suggesting that these fees are recognized over time as the conference services are provided.