How does Exit handle consideration received in advance of performing all significant services?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
Under ASC 606, initial and renewal fees, are recognized as revenue on a straight-line basis over the term of the respective franchise agreement. Consideration received in advance of performing all significant services is included in deferred revenue and recorded as a liability.
Revenue from commissions and transaction fees is recognized in the period in which the franchisee earns the revenue upon which this fee is based and collectability from the customer is reasonably assured. Commissions are computed as a percentage of net sales earned by the franchisee. Transaction fees are flat fees for each transaction, the rates of which vary based on the amount of revenue generated by the franchisee.
Revenue from sponsorships is recognized over the period the related sponsorship lasts.
Management fees
Management fees consist of revenue derived from the Company providing certain sales and management services in specified regions of Exit USA (USA), an agent of Exit Realty Corp. International (EXIT).
The Company's performance obligations under the management agreement are to oversee franchise sales, provide leadership for franchisees, oversee compliance issues, and plan the expenditures of marketing funds for the USA regions as well as work with EXIT's marketing and social media staff to promote the USA regions. All the services the Company provides are highly interrelated and not distinct within the contract and are therefore accounted for under ASC 606 as a single performance obligation, which is satisfied over a period of time.
Under ASC 606, management fee income is recognized as revenue on a straight-line basis over the term of the respective management agreement which commenced on September 10, 2023, and is set to expire on September 10, 2033. Consideration received in advance of performing all significant services is included in deferred revenue and recorded as a liability.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, the company follows specific accounting practices for revenue recognition. For initial and renewal fees, Exit recognizes revenue on a straight-line basis over the term of the respective franchise agreement. This means that the revenue is evenly distributed and recognized throughout the duration of the agreement, rather than all at once. Any consideration, or payment, received in advance of performing all significant services is classified as deferred revenue and recorded as a liability on the company's balance sheet. This deferred revenue represents Exit's obligation to provide services or fulfill obligations in the future.
Similarly, for management fees, which are derived from providing sales and management services in specified regions, Exit also recognizes the income on a straight-line basis over the term of the management agreement. The current management agreement commenced on September 10, 2023, and is set to expire on September 10, 2033. As with franchise fees, any consideration received in advance for these management services is treated as deferred revenue and recorded as a liability. This approach ensures that Exit recognizes revenue only as it fulfills its service obligations over time.
This accounting treatment is in accordance with ASC 606, which is a standard for revenue recognition. By deferring revenue until services are performed, Exit provides a more accurate representation of its financial performance. For a prospective franchisee, this means that Exit's reported revenue in any given period reflects the actual services delivered during that period, rather than being skewed by upfront payments. This can provide a clearer picture of the company's ongoing financial health and stability.