How does City Wide handle broker fees associated with the initial sale of a franchise?
City_Wide Franchise · 2025 FDDAnswer from 2025 FDD Document
Upon the initial sale of a franchise, the Company is obligated to provide franchisees access to certain proprietary programs, written materials, trademarks, and tools and support associated with their franchise business. Initial franchise fees have been recognized as the Company satisfies the performance obligation over the franchise term on a straight-line basis. The unrecognized portion of initial franchise fees is recorded as deferred franchise revenue. Similarly, broker fees are an incremental cost of obtaining a contract under and are capitalized as deferred franchise costs and amortized over the term of the franchise agreement.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 65)
What This Means (2025 FDD)
According to City Wide's 2025 Franchise Disclosure Document, broker fees associated with the initial sale of a franchise are considered an incremental cost of obtaining a contract. These fees are capitalized as deferred franchise costs. This means City Wide does not immediately expense the broker fees. Instead, they record them as an asset on their balance sheet.
These deferred franchise costs, which include the broker fees, are then amortized over the term of the franchise agreement. Amortization is the process of gradually writing off the value of an asset over its useful life. In this case, City Wide expenses a portion of the broker fees each year throughout the duration of the franchise agreement.
For a prospective City Wide franchisee, this accounting treatment means that City Wide spreads the expense of broker fees over the life of the franchise agreement rather than recognizing it all at once. This approach aligns the expense with the period during which the franchise is generating revenue. It is a common accounting practice to match expenses with the revenues they help generate.