How does Gold Star recognize revenue?
Gold_Star Franchise · 2025 FDDAnswer from 2025 FDD Document
f the utility is derived from its association with the Company's past or ongoing activities. The nature of the Company's promise in granting the franchise license is to provide the franchisee with access to the brand's symbolic intellectual property over the term of license. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
The transaction price in a standard franchise arrangement primarily consists of (a) initial franchise fees; (b) continuing franchise fees (royalties); and (c) advertising fees. Since the Company considers the licensing of the franchising right to be a single performance obligation, no allocation of the transaction price is required. Additionally, all franchise agreements require franchisees to purchase proprietary chili from the Company.
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.
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 revenue from several sources, including franchise fees, royalties, advertising fees, and the sale of proprietary chili products. Each revenue stream is recognized differently based on accounting standards.
Initial franchise fees are recognized as revenue on a straight-line basis over the term of the franchise agreement, starting from the restaurant's opening date. Since these fees are usually received upfront, they are initially recorded as deferred revenue until they are recognized over time. Royalties and advertising fees, which are based on a percentage of the franchisee's gross sales, are recognized when the franchisee reports these sales. The royalty percentage ranges from 1% to 6% of the franchisee's gross revenue, while the advertising revenue percentage is 0.5%.
Revenue from the sales of proprietary chili is recognized when the distributors ship the franchisee's order. Similarly, revenue from retail chili product sales is recognized when the distributors ship the order. Both of these revenue recognitions result in accounts receivable on the balance sheet. Gold Star also has a Development Incentive Program to encourage franchisees to rebrand their Gold Star Chili restaurants. Depending on the package selected, franchisees may receive a reduction in royalty fees of 1% to 3% or a cash contribution of 10% up to $25,000 of remodeling costs. If a franchisee elects the cash contribution, Gold Star records a contract asset that is amortized over 12-18 months and netted with the franchisee royalty fee.
For a prospective franchisee, understanding these revenue recognition policies is crucial for interpreting Gold Star's financial statements and assessing the financial health of the franchise system. It also clarifies how Gold Star accounts for different revenue streams, which can impact the franchisee's financial obligations and incentives, such as the Development Incentive Program.