How does Corner Bakery Cafe recognize its revenue?
Corner_Bakery_Cafe Franchise · 2025 FDDAnswer from 2025 FDD Document
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Notes to Financial Statements For the Reporting Periods ended December 31, 2024 and 2023
Revenue Recognition
The Company recognizes revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services using a five-step model.
Revenue from franchisees, which is primarily comprised of initial franchise fees, franchise royalty fees, advertising fund fees, and other franchise fees, is generated pursuant to a twenty-year renewable contract between the Company and a franchisee.
Initial Franchise Fees
During 2024 or 2023, no franchises were sold, and accordingly, no initial franchise fees were charged.
As of December 31, 2024, there was one franchisee that owned eleven locations, one franchisee that owned seven locations, one franchisee that owned five locations, one franchisee that owned four locations, three franchisees that owned two locations each, and five franchisees that owned one location each.
As of January 1, 2024, each franchisee is required to pay an initial franchise fee of $40,000, upon signing a franchise agreement. The Company offers reduced franchise fees for franchisees that sign a Development Agreement to open two to three locations; however, at this time, no development agreements have been signed. Upon signing a Development Agreement the franchisee will pay $20,000 for each location they agree to develop. The fee is recognizable at the time of the opening of the location.
The initial franchise fee obligates the Company to perform certain pre-opening services, such as assisting with site selection, preparing facilities for intended use, training, establishing operations, and overseeing quality control. Pursuant to ASU No. 2021-02 Franchisors-Revenue from Contracts with Customers (Subtopic 952-606), the Company has determined that
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 55)
What This Means (2025 FDD)
According to the 2025 FDD, Corner Bakery Cafe recognizes revenue from several sources including franchise fees, royalty fees, and advertising fees. The company uses a five-step model to recognize revenue when it transfers goods or services to customers, reflecting the consideration it expects to receive.
Initial franchise fees, which were $40,000 as of January 1, 2024, are recorded as contract liabilities and recognized as revenue when earned. For franchisees signing a Development Agreement, the fee is $20,000 per location and is recognized upon the opening of each location. The initial franchise fee covers pre-opening services such as site selection assistance, facility preparation, training, and quality control, which are treated as a single performance obligation.
Corner Bakery Cafe also collects ongoing revenues. Royalty fees are 5% of gross sales, earned monthly. Advertising fees are 0.75% of gross revenue from franchisees, also earned monthly. Other franchise fees, such as technology and IT fees, noncompliance fees, and late fees, are recognized as revenue in the period they are earned. Advertising fund fees are recognized as revenue in the month they are billed, using a sales-and-usage-based royalties exception. The company estimates franchisee sales and accounts for chargebacks, though no allowance for chargebacks was required as of December 31, 2023, or 2024.
For a prospective Corner Bakery Cafe franchisee, understanding these revenue recognition policies is crucial. It clarifies when and how the franchisor recognizes revenue from various fees, which can impact the franchisee's financial obligations and the franchisor's reported financial performance. Franchisees should pay particular attention to the conditions under which initial fees are earned and the ongoing royalty and advertising fee structures.