How does Exit recognize franchise deferred revenue from initial, renewal, and assignment franchise fees?
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.
Generally, revenue is recognized for each performance obligation as follows:
Initial franchise and regional development rights fees are determined by geographic area and population in that area and are recorded as deferred franchise fee and regional development right fees and amortized as revenue over the life of the franchise agreement (generally five years for franchise rights and ten or fifteen years for regional development rights). Franchise fee renewals are charged 10% of the then current initial franchise fee (not to exceed 25% of the initial franchise fee originally paid by the franchisee) and amortized as revenue over the life of the renewed franchise agreement. Regional development right renewals are charged 25% or 50% of the initial franchise fee depending on the original terms of the agreement.
Assignment income consists of revenue derived from the transfer of 1) rights or obligations under an existing franchise agreement from one franchisee to another, or 2) ownership interests under an existing franchise agreement in a franchisee entity from one franchisee to another. Revenue from assignment income is recognized when control of the franchise rights or ownership is transferred to the new franchisee, and the Company has satisfied its performance obligations under the agreement.
| 2024 | 2023 | 2022 | |
|---|---|---|---|
| Deferred revenues – beginning of year | $ 253,796 | $ 317,558 | $ 308,853 |
| Additions for initial franchise fees received | 40,000 | 33,750 | 80,000 |
| Additions for renewal fees received | 25,750 | 19,500 | 28,250 |
| Additions for assignment fees received | 10,750 | 8,625 | 18,000 |
| Reduction for amounts deemed uncollectible | - | (10,100) | - |
| Revenue recognized during the year | (106,088) | (115,536) | (117,545) |
| Deferred revenues – end of year | $ 224,208 | $ 253,796 | $ 317,558 |
Source: Item 23 — RECEIPT (FDD pages 42–235)
What This Means (2025 FDD)
According to Exit's 2025 Franchise Disclosure Document, the company recognizes initial and renewal fees 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. This means that Exit does not immediately recognize these fees as income when they are received. Instead, they are recognized gradually over the life of the franchise agreement. For franchise rights, this is generally five years, while for regional development rights, it is ten or fifteen years. Franchise fee renewals are charged 10% of the then-current initial franchise fee, but not exceeding 25% of the initial fee originally paid, and are amortized over the renewal term. Regional development right renewals are charged 25% or 50% of the initial franchise fee depending on the original terms of the agreement. Assignment income, which comes from transferring franchise rights or ownership, is recognized when control is transferred to the new franchisee and Exit has met its obligations.
For a prospective Exit franchisee, this accounting practice means that the initial franchise fee, renewal fees, and assignment fees collected are not immediately recognized as revenue by Exit. Instead, these fees are deferred and recognized as revenue over the term of the franchise agreement. This approach aligns with accounting standards (ASC 606) that require revenue to be recognized when the franchisor has fulfilled its obligations to the franchisee.
The 2025 FDD also provides a table showing deferred revenues for the years 2022, 2023 and 2024. For example, the additions for initial franchise fees received were $40,000 in 2024, $33,750 in 2023, and $80,000 in 2022. Additions for renewal fees received were $25,750 in 2024, $19,500 in 2023 and $28,250 in 2022. Additions for assignment fees received were $10,750 in 2024, $8,625 in 2023, and $18,000 in 2022. This table also shows the revenue recognized during each year and the deferred revenues at the end of each year. This gives a franchisee insight into how Exit manages and recognizes its revenue streams over time.