How does Gold Star recognize franchise fees as revenue?
Gold_Star Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognized the primary components of the transaction price as follows:
- Franchise fees are recognized as revenue ratably on a straight-line basis over the term of the franchise agreement commencing with the restaurant opening date (over time). As these fees are typically received in cash at or near the beginning of the franchise term, the cash received is initially recorded as deferred revenue (contract liability) until recognized as revenue over time.
- The Company is entitled to royalties and advertising fees based on a percentage of the franchisee's gross sales as defined in the franchise agreement. Royalty and advertising revenue is recognized when the franchisee's reported sales occur (point in time). Depending on timing within a period, the recognition of revenue results in either what is considered an unbilled receivable (contract asset) or once billed, royalty receivable, on the balance sheet. The royalty revenue percentage applied to franchise store revenue ranges from 1% to 6%. The advertising revenue percentage applied to franchise store revenue is 0.5%.
- Revenue from the sales of proprietary chili is recognized in the period in which distributors ship the franchisee's order; recognition of revenue (point in time) results in accounts receivable on the balance sheet.
- Revenue from the sales of retail chili products is recognized in the period in which distributors ship the order; recognition of revenue (point in time) results in accounts receivable on the consolidated balance sheets.
Source: Item 23 — Receipts (FDD pages 53–163)
What This Means (2025 FDD)
According to Gold Star's 2025 Franchise Disclosure Document, the company recognizes franchise fees as revenue ratably on a straight-line basis over the term of the franchise agreement, starting from the restaurant opening date. This is considered 'over time' revenue recognition. Since these fees are typically received in cash at or near the beginning of the franchise term, the cash is initially recorded as deferred revenue, which is a contract liability, until it is recognized as revenue over the franchise term.
This means that Gold Star does not recognize the entire initial franchise fee as revenue immediately upon receipt. Instead, it spreads the recognition of the revenue over the life of the franchise agreement. For a prospective franchisee, this accounting practice means that Gold Star's reported revenue in any given period does not fully reflect the initial fees they collect from new franchisees.
In addition to franchise fees, Gold Star also recognizes revenue from royalties, advertising fees, and the sale of proprietary chili. Royalties and advertising fees are recognized when the franchisee's reported sales occur, while revenue from chili sales is recognized when the distributors ship the franchisee's order. These revenues are recognized 'at a point in time'. The royalty revenue percentage ranges from 1% to 6%, and the advertising revenue percentage is 0.5% of the franchisee's gross sales.