What are the primary components of franchise revenue for Closet Storage Concepts?
Closet_Storage_Concepts Franchise · 2025 FDDAnswer from 2025 FDD Document
a common control arrangement to determine if a lease exists and the accounting and classification for the lease.
Revenue Recognition
Franchise Revenue
Franchise revenues consist primarily of royalties, National Advertising Program contributions, and initial franchise fees.
The Company's primary performance obligation under the franchise license is granting certain rights to use the Company's intellectual property, and all other services the Company provides under the franchise agreement are highly interrelated, not distinct within the contract, and therefore accounted for under ASC 606 as a single performance obligation, which is satisfied by granting certain rights to use our intellectual property.
Royalties are calculated as a percentage of the franchisee's sales. Franchisee contributions to national advertising funds are based on a fixed dollar assessment. Under our franchise agreements, advertising contributions paid by franchisees, must be spent on advertising, marketing and related activities. Our franchise royalties, represent sales‐based royalties that are related entirely to our performance obligation under the franchise agreement and are recognized as franchise sales occur.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
Franchise Revenue (Continued)
Initial franchise fees are payable by the franchisee upon signing a new franchise agreement or successor franchise agreement. Revenue from initial fees is recognized when the performance obligation is satisfied. Performance obligations that are normally satisfied by the opening of the franchised business to the public are determined to be earned during the period from the execution of the contract to the opening of the franchised business which is generally less than one year. Unearned initial fee revenues from franchisee acquisition and acceptance will be as deferred non‐refundable revenue and recognized as revenue over the term of the contract which is currently 10 years.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2025 FDD)
According to Closet Storage Concepts' 2025 Franchise Disclosure Document, franchise revenues primarily consist of royalties, National Advertising Program contributions, and initial franchise fees. These revenue streams are crucial for Closet Storage Concepts as they reflect the ongoing support and brand development efforts provided to franchisees.
Royalties are calculated as a percentage of the franchisee's sales, meaning that Closet Storage Concepts' income from this source is directly tied to the success of its franchisees. Franchisee contributions to national advertising funds are based on a fixed dollar assessment, ensuring a consistent investment in marketing and brand awareness. These advertising contributions must be spent on advertising, marketing, and related activities.
Initial franchise fees are paid upon signing a new or successor franchise agreement, with revenue recognized when the performance obligation is satisfied, typically within a year of the contract's execution when the franchised business opens. Any unearned initial fee revenues are deferred and recognized over the 10-year term of the contract. However, as of the latest financial assessment, there are no unearned initial fee revenues, indicating that all performance obligations have been met.