What is the primary driver of revenue for Exit?
Exit Franchise · 2025 FDDAnswer from 2025 FDD Document
d 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. While determining relative standalone selling price and identifying separate performance obligations require judgment, generally relative standalone selling prices and the separate performance obligations are readily identifiable as the Company sells those performance obligations unaccompanied by other performance obligations.
Franchise revenue
Franchise revenues consist of the initial franchise fee, renewal fees, and franchise commission income.
Upper Midwest Realty, Inc. d.b.a. Exit Realty Upper Midwest 10 Notes to Financial Statements (continued) December 31, 2024, 2023, and 2022
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
Franchise revenue (continued)
The Company's primary performance obligation under the franchise license is granting certain rights to use the Company's intellectual property, and all the other services the Company provides are highly interrelated and not distinct within the contract, and therefore accounted for under ASC 606 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.
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.
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, franchise revenues consist of the initial franchise fee, renewal fees, and franchise commission income. The primary performance obligation for Exit under the franchise license is granting rights to use the company's intellectual property. All other services that Exit provides are 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 Exit's intellectual property over the term of the franchise agreement.
Under accounting standards, Exit recognizes initial and renewal fees 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 doesn't recognize the entire initial franchise fee as revenue immediately but spreads it out over the life of the franchise agreement.
In addition to franchise fees, Exit also generates revenue from commissions and transaction fees. These are recognized in the period in which the franchisee earns the revenue upon which the fee is based, assuming collectability from the customer is reasonably assured. Commissions are computed as a percentage of net sales earned by the franchisee, while transaction fees are flat fees that vary based on the revenue generated by the franchisee. Exit also recognizes revenue from sponsorships over the period the related sponsorship lasts.
Management fees also contribute to Exit's revenue. These fees are derived from Exit providing sales and management services in specified regions of Exit USA. The company's obligations include overseeing franchise sales, providing leadership for franchisees, overseeing compliance issues, and planning the expenditures of marketing funds for the USA regions. These services are considered a single performance obligation, satisfied over time, and the management fee income is recognized as revenue on a straight-line basis over the term of the management agreement, which commenced on September 10, 2023, and is set to expire on September 10, 2033. Assignment income, derived from the transfer of franchise rights or ownership interests, is recognized when control is transferred to the new franchisee and Exit has satisfied its performance obligations.