After the delivery of pre-opening services, how are the remaining fees from a Kidokinetics franchise agreement handled?
Kidokinetics Franchise · 2024 FDDAnswer from 2024 FDD Document
The Company has determined the fair value of pre-opening services. This amount is recognized upon the deliver of all pre-opening services, which is generally the commencement of operations. The remaining fees are then amortized over the life of the agreement.
Under the franchise agreement, franchisees are granted the right to operate a location using the Kidokinetics system for a period of ten years. Under the Company's revenue recognition policy, the Company allocates a portion of the initial franchise fee to pre-opening services, which is recognized when the franchise begins operations. The remainder is deferred, and the revenue is amortized over the life of the contract. In addition, the Company defers related contract costs such as broker commissions and training costs over the same period and records them as deferred contract costs.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2024 FDD)
According to Kidokinetics's 2024 Franchise Disclosure Document, the company allocates a portion of the initial franchise fee to pre-opening services, which is recognized when the franchise begins operations. Kidokinetics considers assistance in site selection, facility preparation, franchisee training, manual preparation, and bookkeeping as pre-opening services. The fair value of these services is determined and recognized upon completion, typically at the commencement of operations.
After recognizing the revenue associated with pre-opening services, the remaining fees are deferred. Kidokinetics then amortizes these deferred fees over the life of the franchise agreement.
This accounting practice means that Kidokinetics recognizes the revenue from the initial franchise fee gradually over the term of the agreement, which is generally ten years. Additionally, Kidokinetics defers related contract costs, such as broker commissions and training costs, over the same period, recording them as deferred contract costs. This approach aligns revenue recognition with the delivery of services and the franchisee's use of the Kidokinetics system over the franchise term.