What are franchise fees collected prior to the location opening considered for Crave Cookies?
Crave_Cookies Franchise · 2025 FDDAnswer from 2025 FDD Document
For the franchise fees, the Company has determined that the services they provide in exchange for upfront franchise fees, which primarily relate to pre-opening training and other services, are individually distinct from the ongoing services they provide to their franchisees. As a result, these pre-opening are recognized upon the franchise opening, and completion of the related training. The pre-opening fees that are recognized upon the franchise opening are generally approximately 80% of the initial franchise fee. The remaining portion of the upfront franchise fees are recognized as revenue over the expected life of the franchise agreement, which is generally 10 years. If a franchise location closes before this estimated 10-year life, the Company recognizes the remaining unearned revenue and deferred costs into income at the time the location closes. Revenues for these upfront franchise fees are recognized on a straight-line basis, which is consistent with the franchisee's right to use and benefit from the intellectual property. Franchise fees that are collected prior to the location opening are considered contract liabilities (also known as deferred revenue) and are recognized as income when the franchise location opens.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 47)
What This Means (2025 FDD)
According to Crave Cookies' 2025 Franchise Disclosure Document, franchise fees collected before a location opens are classified as contract liabilities, also known as deferred revenue. This means Crave Cookies does not immediately recognize these fees as income. Instead, they are recorded as a liability on the company's balance sheet, representing Crave Cookies' obligation to provide services or fulfill certain conditions before the revenue can be recognized.
Specifically, Crave Cookies recognizes approximately 80% of the initial franchise fee as revenue upon the franchise opening and completion of related training. The remaining portion of the upfront franchise fees is recognized as revenue over the expected life of the franchise agreement, generally 10 years. This approach aligns with accounting principles that require revenue to be recognized when it is earned, rather than when cash is received.
For a prospective Crave Cookies franchisee, this accounting treatment is important because it reflects the franchisor's commitment to providing pre-opening support and training. The deferred revenue represents the value of these future services. If a Crave Cookies franchise location closes before the estimated 10-year life, the company recognizes the remaining unearned revenue and deferred costs into income at the time of closure. This could impact the financial statements of Crave Cookies, potentially affecting its profitability in the event of franchise closures.