What are the components of the transaction price in a standard Deer Solution franchise arrangement?
Deer_Solution Franchise · 2025 FDDAnswer from 2025 FDD Document
The transaction price in a standard franchise arrangement consists of (a) franchise/development fees; (b) Marketing, brand development and royalties Fees and (c) IT Fees; (d) Annual Conference Fees. The Company utilize ASC 606 five-stops revenue recognition model as follows:
- · Identify the contract with the customer.
- Identify the performance obligation in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue when (or as) each performance obligation is satisfied.
The terms of the Company's franchise agreement will be as follows:
- The Company will grant the right to use the Company name, trademark and system in the franchisee's franchise development business.
- The franchisee is obligated to pay a non-refundable initial franchise fee.
- The franchisee is obligated to pay a monthly royalties, marketing, IT, and annual conference fees. Certain other fees are also outlined in the agreement.
Franchise revenues are recognized by the Company from the following different sources: The Company recognizes franchise fees as two (2) performance obligations. The first, pre-opening services, including access to manuals, assistance in site selection, and initial training, have been determined to be distinct services offered to franchisees. Pre-opening services are earned over a period of time using an input method of completion based on costs incurred for each franchisee at the end of each year.
The second, access to the franchise license, has been determined to be distinct. The amount allocated to the franchise license is earned over time as performance obligations are satisfied due to the continuous transfer of control to the franchisee. Franchise and development fees are paid in advance of the franchise opening, typically when entering into a new franchise or development agreement. Fees allocated to the franchise license are recognized as revenue on a straight-line basis over the term of each respective franchise agreement. Initial franchise agreement terms are typically 7 years while successive agreement terms are typically 7 years.
Variable Considerations
Franchise agreements contain variable considerations in the form of royalty fees and brand development (advertising). These fees are based on franchisee sales and are recorded as revenue and recognized as these services are delivered because the variable payment relates specifically to the performance obligation of using the license.
Source: Item 23 — RECEIPTS (FDD pages 55–246)
What This Means (2025 FDD)
According to the 2025 Deer Solution Franchise Disclosure Document, the transaction price in a standard franchise arrangement includes several components. These are the franchise or development fees, marketing, brand development and royalties fees, IT fees, and annual conference fees. Deer Solution utilizes the ASC 606 five-step revenue recognition model to manage its revenue recognition.
Deer Solution recognizes franchise fees as two performance obligations: pre-opening services and access to the franchise license. Pre-opening services include access to manuals, assistance in site selection, and initial training. These are considered distinct services and are earned over a period using an input method based on costs incurred for each franchisee at the end of each year. The access to the franchise license is also distinct, and the allocated amount is earned over time as performance obligations are satisfied through the continuous transfer of control to the franchisee. Franchise and development fees are typically paid in advance when entering into a new agreement. Fees for the franchise license are recognized as revenue on a straight-line basis over the term of the franchise agreement, which is typically 7 years, with successive terms also being 7 years.
Franchise agreements with Deer Solution also involve variable considerations in the form of royalty fees and brand development (advertising) fees. These fees are based on franchisee sales and are recorded as revenue and recognized as the services are delivered, as the variable payment is directly related to the performance obligation of using the license. This means that a franchisee's financial obligations to Deer Solution will fluctuate based on their sales performance, aligning the franchisor's revenue with the franchisee's success.