What happens to the franchise fee paid to Crave Cookies before revenue recognition criteria are met?
Crave_Cookies Franchise · 2025 FDDAnswer from 2025 FDD Document
t-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.
Notes to the Financial Statements
Note 2 - Revenue from Contracts with Franchisees (continued)
During the year ended December 31, 2024, the Company recognized franchising fees of $710,776. Franchisee deposits in amount of $1,277,049 have been deferred until the revenue recognition requirements of generally accepted accounting principles have been met.
Revenues from continuing fees, including royalties, marketing fees and upfront franchise fees. The Company receives a monthly royalty fee equal to 6% and monthly marketing fee equal to 2% of the franchisees weekly gross sales due the following Tuesday. These royalty payments are considered to be variable consideration; however, the Company relies on a narrow exception to the variable consideration criteria where there is a sales-based or usage-based royalty and marketing. Under this exception, the Company recognizes revenue for sales-based royalty and marketing revenue on a monthly basis based on sales reports by their franchisees.
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 the company has performed substantially all required services are considered contract liabilities, also known as deferred revenue. This means that Crave Cookies holds the franchise fee as an obligation on their balance sheet until they meet specific revenue recognition criteria.
Crave Cookies recognizes revenue from franchise fees in two stages. Approximately 80% of the initial franchise fee is recognized as revenue upon the franchise opening and completion of related training. The remaining 20% of the upfront franchise fees are recognized as revenue over the expected life of the franchise agreement, which is generally 10 years. This portion is recognized on a straight-line basis, reflecting the franchisee's right to use and benefit from Crave Cookies' intellectual property over that period.
If a Crave Cookies franchise location closes before the estimated 10-year life of the franchise agreement, the company recognizes any remaining unearned revenue and deferred costs into income at the time of closure. During the year ended December 31, 2024, Crave Cookies recognized franchising fees of $710,776, while franchisee deposits totaling $1,277,049 were deferred until the revenue recognition requirements were met. This deferral ensures that Crave Cookies does not recognize revenue until it has fulfilled its obligations to the franchisee, aligning with standard accounting practices.