How does Exit allocate a contract's transaction price to each performance obligation?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
f presentation**
The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) as codified by the Financial Accounting Standards Board (FASB).
Franchising
The Company executes franchise agreements that set the terms of its arrangement with each franchisee. The agreements cover a five-year period. The franchise agreements require the franchisee to pay an initial, nonrefundable fee of $7,500 for a rural density franchise, $15,000 for a medium density franchise, and $25,000 for a high-density franchise, and continuing fees based upon a percentage of sales. Subject to the Company's approval and payment of a renewal fee, a franchisee may generally renew its agreement upon its expiration. Direct costs of sales and servicing of franchise agreements are charged to operating expenses as incurred.
Revenue recognition
The Company accounts for revenue in accordance with FASB ASU No. 2019-09, Revenue from contracts with Customers (Topic 606).
Performance obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of accounting in Topic 606. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract's transaction price to each performance obligation based on the relative standalone selling price. The primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts their expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service based on margins for similar services sold on a standalone basis.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, when contracts have multiple performance obligations, Exit allocates the contract's transaction price to each performance obligation based on the relative standalone selling price. The primary method used to estimate this standalone selling price is the expected cost plus a margin approach. This involves forecasting the expected costs of satisfying a performance obligation and then adding an appropriate margin for that distinct good or service, based on margins for similar services sold on a standalone basis.
For Exit, the company's primary performance obligation under the franchise license is granting certain rights to use Exit's intellectual property. All other services that Exit provides are considered highly interrelated and not distinct within the contract. Therefore, they are accounted for as a single performance obligation, which is satisfied by granting rights to use the company’s intellectual property over the term of the franchise agreement.
Initial and renewal fees are recognized as revenue on a straight-line basis over the term of the respective franchise agreement. Any consideration received in advance of performing all significant services is included in deferred revenue and recorded as a liability. This means that Exit recognizes revenue proportionally over the life of the franchise agreement rather than recognizing the entire fee upfront.