How does Hydrodog allocate initial franchise fees between preopening services and the franchise right?
Hydrodog Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company has obligations to provide franchisees with the franchise rights to operate Hydrodog businesses, training, and other assistance to launch their franchise, as well as to provide software and technology services and brand marketing and advertising support. The Company has elected to adopt Accounting Standards Update No. 2021-02, Franchisors - Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient, to address concerns about the complexity of applying Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, to private company franchisors, specifically relating to the amount and timing of revenue recognition for initial franchise fees. The Company has concluded that certain preopening services (training, site selection, etc.) are a separate performance obligation distinct from the franchise license. Therefore, initial franchise fees for preopening services are allocated between the preopening services and the franchise right for each individual franchise. The preopening services revenue is recognized when the franchise is opened, as the Company cannot reasonably estimate its progress toward satisfaction of that obligation. Typically, the initial franchise fee is less than the stand-alone selling price of the preopening services provided; therefore, the initial fee is fully recognized by the time the business opens.
Source: Item 23 — RECEIPTS (FDD pages 43–166)
What This Means (2025 FDD)
According to Hydrodog's 2025 Franchise Disclosure Document, the company allocates initial franchise fees between preopening services and the franchise right. Hydrodog considers preopening services like training and site selection as a separate performance obligation from the franchise license itself. This means that a portion of the initial franchise fee covers these specific services, while the remaining portion covers the right to operate a Hydrodog franchise.
Hydrodog recognizes revenue for preopening services when the franchise opens. This is because Hydrodog cannot reasonably estimate its progress toward satisfying its obligation to provide these services before the opening. The FDD states that the initial franchise fee is typically less than the stand-alone selling price of the preopening services. As a result, Hydrodog fully recognizes the initial fee by the time the business opens.
For a prospective Hydrodog franchisee, this accounting practice means that the initial franchise fee covers both the right to use the Hydrodog brand and system, as well as the preopening support provided by the franchisor. The fee is recognized as revenue by Hydrodog only once the franchise location is open and operating. This approach aligns with accounting standards that require franchisors to allocate revenue to different performance obligations within the franchise agreement.