How is the royalty income for Golden Krust Caribbean Restaurant calculated?
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 35)
What This Means (2024 FDD)
According to Golden Krust Caribbean Restaurant's 2024 Franchise Disclosure Document, royalty income is a continuing fee paid weekly by franchisees, calculated as a percentage of their gross sales. This royalty income is recognized over the term of the franchise agreement, based on the royalties earned each period as the underlying sales occur. Any royalty revenue that is not paid within 30 days is reserved against.
For a prospective Golden Krust Caribbean Restaurant franchisee, this means that a portion of their weekly gross sales will be remitted to the franchisor as royalty payments. The exact percentage is not specified in this excerpt. Franchisees need to ensure they accurately track and report their gross sales to calculate the correct royalty amount. The fact that unpaid royalties are reserved against after 30 days suggests that Golden Krust Caribbean Restaurant actively monitors and enforces royalty payment terms.
In addition to royalty fees, Golden Krust Caribbean Restaurant franchisees also pay continuing advertising fees weekly, based on a percentage of gross sales. These advertising fees are also recognized over the term of the franchise agreement as the underlying sales occur. Any advertising revenue not paid within 30 days is reserved against.
Prospective franchisees should clarify the specific percentage used to calculate both royalty and advertising fees, and understand the implications of late payments, as these can directly impact their profitability and relationship with Golden Krust Caribbean Restaurant.