How does Craters & Freighters account for pre-opening services in relation to the franchise license and ongoing services?
Craters_Freighters Franchise · 2025 FDDAnswer from 2025 FDD Document
Franchise Revenues
Franchise revenues consist primarily of royalties, advertising, technology and insurance fund contributions, and initial franchise fees. Under franchise agreements, the Company generally provides franchisees with (a) a franchise license, which includes a license to use the Company's intellectual property, advertising and promotion management, technology platforms, and insurance services, (b) pre-opening services, and (c) ongoing services. As a practical expedient (as defined in ASC 952-606-25-2 Revenue from Contracts with Customers, Recognition), the Company accounts for its pre-opening services as a distinct service from the franchise license and ongoing services in a franchise agreement. Pre-opening services include (a) assistance in the selection of a site, (b) assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiations, (c) training of the franchisee's personnel or the franchisee, (d) preparation and distribution of manuals and similar material concerning operations, administration, and record keeping (e) bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes or about regulations affecting the franchisee's business, and (f) inspection, testing, and other quality control programs. The Company records these pre-opening services fees as initial franchise fee revenue upon satisfaction of the performance obligation, typically when the franchisee begins operations. During the years ended December 31, 2024 and 2023, the Company received initial franchise fee revenue of $88,255 an
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 49)
What This Means (2025 FDD)
According to the 2025 Craters & Freighters Franchise Disclosure Document, Craters & Freighters distinguishes pre-opening services from the franchise license and ongoing services. The company uses a practical approach as defined in accounting standards (ASC 952-606-25-2) to treat pre-opening services as a separate service within the franchise agreement. This means that the revenue from these services is recognized independently from the franchise license and the continuing support provided to the franchisee.
Pre-opening services provided by Craters & Freighters include a range of assistance to help the franchisee establish their business. These services encompass site selection, help in securing and preparing facilities (including financing, architectural, engineering services, and lease negotiations), personnel training, providing operational manuals, bookkeeping, IT and advisory services related to taxes and regulations, and quality control programs.
Craters & Freighters recognizes revenue from these pre-opening services, which are collected as initial franchise fees, once the company has fulfilled its obligation to provide these services. Typically, this occurs when the franchisee commences operations. For example, in the year ending December 31, 2024, Craters & Freighters received $88,255 in initial franchise fee revenue, and $39,000 in the year prior.