How does Golden Krust Caribbean Restaurant handle payments for restaurant sales?
Golden_Krust_Caribbean_Restaurant Franchise · 2024 FDDAnswer from 2024 FDD Document
hat a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met.
Franchise License and Royalty Income
The Company sells individual franchises that grant the right to develop restaurants in designated locations. The franchise agreements typically require the franchisee to pay initial, nonrefundable franchise license fees prior to opening the respective restaurant, as well as continuing fees, or royalty income, on a weekly basis based upon a percentage of franchisee gross sales. The initial term of the franchise agreements are typically ten years. Prior to the end of the franchise term, or as otherwise provided by the Company, a franchisee may elect to renew the term of a franchise agreement and, if approved, will typically pay a renewal fee upon execution of the renewal term. Generally, the franchise license granted for each individual restaurant within an arrangement represents a single performance obligation.
Initial franchise fees for each arrangement are allocated to each individual restaurant and recognized over the term of the respective franchise agreement from the date of the restaurant opening. Royalty income is also recognized over the term of the respective franchise agreement based on the royalties earned each period as the underlying sales occur. Fees received or receivable that are expected to be recognized as revenue within one year are classified as current deferred revenue on the balance sheets. Any royalty revenue that is not paid within 30 days is reserved against.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Advertising Fees
The Company, under its franchise agreements, typically requires the franchisee to pay continuing advertising fees on a weekly basis based on a percentage of franchisee gross sales, which represents a portion of the consideration received in return for continuing advertising support. Continuing advertising fees are recognized over the term of the respective franchise agreement based on the fees earned each period as the underlying sales occur. Any advertising revenue that is not paid within 30 days is reserved against.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
The 2024 Franchise Disclosure Document for Golden Krust Caribbean Restaurant outlines how the company handles revenue recognition, including franchise fees, royalties, and advertising fees. Initial franchise fees are allocated to each restaurant and recognized over the term of the franchise agreement, starting from the restaurant's opening date. Royalty income, which is a percentage of the franchisee's gross sales, is also recognized over the term of the agreement as the sales occur. Any royalty revenue not paid within 30 days is reserved against. This means Golden Krust Caribbean Restaurant sets aside funds to cover potential non-payment of royalties.
Franchisees are required to make monthly contributions to an advertising fund, calculated as a percentage of their sales. These funds are kept separate and used specifically for advertising related to the franchise. They cannot be used for Golden Krust Caribbean Restaurant's general operating expenses, unless otherwise specified in the FDD. Any unspent advertising revenues are included in accrued expenses on the balance sheets. According to the FDD, for the years 2023 and 2022, Golden Krust Caribbean Restaurant spent more on advertising than it received in advertising revenue from its franchisees, resulting in no accrued advertising expenses.
For a prospective franchisee, this means that a portion of their sales will go towards royalty and advertising fees. The royalty fees are recognized as revenue by Golden Krust Caribbean Restaurant as the franchisee makes sales. The advertising fees are pooled and used for the benefit of the entire franchise system. It is important for franchisees to understand the percentages and terms related to these fees, as they directly impact their profitability and cash flow. Franchisees should also be aware that unpaid royalties after 30 days may be subject to reserves, potentially affecting their financial standing with the franchisor.
Additionally, the FDD notes that Golden Krust Caribbean Restaurant has relationships with related parties, specifically Golden Krust Caribbean Bakery, Inc., which supplies a significant amount of food and beverage products to both company-owned and franchised restaurants. These transactions are also considered in the financial statements, with any receivables or payables between the companies accruing interest at a rate of 1% per annum. This relationship is important for franchisees to understand, as it highlights a potential source for supplies and the financial interactions between Golden Krust Caribbean Restaurant and its related entities.