How does Kidokinetics recognize royalties from locations operated by a franchisee?
Kidokinetics Franchise · 2024 FDDAnswer from 2024 FDD Document
For each franchised location, the Company enters into a formal franchise agreement that clearly outlines the transaction price, which includes both an initial fee and ongoing fees, and the Company's performance obligations. For service revenues, the Company enters into contracts with individual customers and franchisees.
Upon evaluation of the five-step process, the Company has determined that royalties from locations operated by a franchisee, which are based on a percentage of gross revenue, are to be recognized at the time the underlying sales occur. Service revenue is to be recognized in the period the services are performed. In allocating the transaction price and recognizing the revenue associated with initial franchise fees, the Company has elected to adopt the practical expedient for private company franchisors outlined in ASC 952-606, Franchisors—Revenue from Contracts with Customers. The practical expedient allows franchisors to account for pre-opening services as a single distinct performance obligation. These pre-opening services include the following:
- Assistance in the selection of a site
- Assistance in obtaining facilities and preparing the facilities for their intended use, including related financing, architectural, and engineering services, and lease negotiation
- Training of the franchisee's personnel or the franchisee
- Preparation and distribution of manuals and similar material concerning operations, administration, and record keeping
- Bookkeeping, information technology, and advisory services, including setting up the franchisee's records and advising the franchisee about income, real estate, and other taxes about local regulations affecting the franchisee's business
- Inspection, testing, and other quality control programs
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 59)
What This Means (2024 FDD)
According to Kidokinetics's 2024 Franchise Disclosure Document, the company recognizes royalties from franchised locations based on a percentage of gross revenue. These royalties are recognized at the time the underlying sales occur. This means that as a Kidokinetics franchisee generates revenue, a percentage of that revenue is immediately recognized by Kidokinetics as royalty income.
This approach aligns with the standard accounting practice of recognizing revenue when it is earned and realized or realizable. For a prospective franchisee, this means that Kidokinetics's financial statements will reflect royalty revenue in the same period that the franchisee generates the sales. This provides transparency in how the franchisor's revenue is tied to the performance of its franchisees.
In addition to royalties, Kidokinetics also earns revenue from initial franchise fees, marketing fees, and service revenue. The service revenue is recognized in the period the services are performed. The initial franchise fees are allocated between pre-opening services and the remaining fees, with pre-opening services recognized upon delivery and the remaining fees amortized over the life of the franchise agreement.