What was the purpose of the note agreement Engel & Volkers entered into with a direct franchisee?
Engel_Volkers Franchise · 2025 FDDAnswer from 2025 FDD Document
evaluation performed on December 31, 2022 resulted in a partial forgiveness of debt. As a result of the adoption of ASC 326, effective January 1, 2023, and management's expectation that revenue metrics will be met, a full allowance was taken against the remaining balance of this note. The loan receivable does not bear interest if the direct franchisee remains within the terms of the agreement and stated revenue metric.
On October 21, 2022, the Company entered into a note agreement with a direct franchisee in the amount of $200,000 to expand the territory under the direct franchisee. The agreement expires after three calendar years starting on January 1, 2023. At the end of each calendar year, the note is evaluated based on a revenue metric. If the metric is satisfied, one-third of the principal balance will be forgiven by the Company. As a result of the adoption of ASC 326, effective January 1, 2023, and management's expectation that revenue metrics will be partially met, a partial allowance was taken against the remaining balance of this note. The loan receivable does not bear interest if the direct franchisee remains within the terms of the agreement and stated revenue metric.
On January 31, 2023, the Company entered into a note agreement with a direct franchisee in the amount of $1,000,000 to expand the territory under the direct franchisee. The agreement had an original maturity date of January 31, 2024. On January 1, 2024, the agreement was amended to extend the maturity date to November 31, 2024. The principal amount bore interest at 10.5%, paid in full at the end of each quarter. The Company calculated interest based on the amount of days from the beginning of the year for the first payment, and the amount of days since the last payment. The total amount of interest income for the year ended December 31, 2024, amounted to $56,786. The note receivable and corresponding interest was collected during 2024.
NOTE 5. NOTES RECEIVABLE (CONTINUED)
During 2023, the Company entered into four additional Market Development note agreements with direct franchisees, totaling approximately $556,000. At the end of each calendar year, the notes are evaluated based on a revenue metric. If the metric is satisfied, a portion of the principal balance will be forgiven by the Company. A partial allowance was taken against the remaining balance of these notes. The loans receivable do not bear interest if the direct franchisee remains within the terms of the agreement and stated revenue metric.
During 2024, the Company entered into additional Market Development note agreements with direct franchisees, totaling approximately $360,000. At the end of each calendar year, the notes are evaluated based on a revenue metric. If the metric is satisfied, a portion of the principal balance will be forgiven by the Company. A partial allowance was taken against the remaining balance of these notes.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 88)
What This Means (2025 FDD)
According to Engel & Volkers' 2025 Franchise Disclosure Document, the company enters into note agreements with direct franchisees to facilitate territory expansion.
Specifically, on October 21, 2022, Engel & Volkers entered into a note agreement with a direct franchisee for $200,000 for this purpose. This agreement was set to expire after three calendar years, beginning January 1, 2023. The terms of the note included an evaluation at the end of each calendar year based on a revenue metric. If the franchisee met the specified revenue goals, Engel & Volkers would forgive one-third of the principal balance. Due to the adoption of ASC 326, effective January 1, 2023, and the expectation that revenue metrics would be partially met, Engel & Volkers took a partial allowance against the remaining balance of this note. The loan did not bear interest as long as the franchisee remained within the terms of the agreement and met the stated revenue metric.
Similarly, on December 18, 2018, Engel & Volkers entered into another note agreement with a direct franchisee, this time for $400,000, also to expand the franchisee's territory. This agreement was to expire after 10 calendar years, starting January 1, 2019, with a similar annual evaluation based on revenue metrics. If the franchisee satisfied the revenue metric, Engel & Volkers would forgive one-tenth of the principal balance each year. An evaluation on December 31, 2022, resulted in a partial forgiveness of debt. Following the adoption of ASC 326, effective January 1, 2023, and anticipating that revenue metrics would be met, a full allowance was taken against the remaining balance of this note. This loan also did not bear interest if the franchisee remained within the terms and met the revenue metric.
During 2023, Engel & Volkers entered into four additional Market Development note agreements with direct franchisees, totaling approximately $556,000. In 2024, additional agreements totaled approximately $360,000. These notes also included a provision for partial forgiveness of the principal balance if the franchisees met specified revenue metrics at the end of each calendar year. Like the other notes, these loans did not accrue interest as long as the franchisees complied with the agreement terms and revenue metrics.