What conditions must be substantially performed by Monicals Pizza before initial franchise fees are recognized?
Monicals_Pizza Franchise · 2025 FDDAnswer from 2025 FDD Document
In accordance with ASU 2021-02, initial franchise fees are recognized when the services and conditions relating to the sale of the franchise are substantially performed or satisfied by the Company. The services and conditions required to be performed or satisfied by the Company principally include site selection approval, equipment specification assistance and training assistance. Franchise fees received prior to substantial performance by the Company are deferred. Substantial performance is normally deemed to have occurred when the related franchise location opens for business. There were no initial franchise fees included within franchising revenue in the accompanying consolidated financial statements for the years ended December 31, 2024 and 2023.
Source: Item 23 — RECEIPTS (FDD pages 46–257)
What This Means (2025 FDD)
According to Monicals Pizza's 2025 Franchise Disclosure Document, the initial franchise fees are recognized when the services and conditions relating to the sale of the franchise are substantially performed or satisfied by the company. These services and conditions primarily include site selection approval, equipment specification assistance, and training assistance. Monicals Pizza defers franchise fees received prior to this substantial performance.
Substantial performance is typically considered to have occurred when the franchise location opens for business. This means that Monicals Pizza does not recognize the initial franchise fee as revenue until the franchisee's restaurant is open and operating. This policy ensures that the franchisee receives the promised support and services before Monicals Pizza recognizes the revenue.
For prospective franchisees, this policy offers some assurance that Monicals Pizza is incentivized to provide the necessary support to get the restaurant up and running. Franchisees can expect assistance with site selection, equipment specifications, and training, and Monicals Pizza's accounting practices tie revenue recognition to the successful opening of the franchise location. This is a fairly standard practice in the franchise industry, as it aligns the franchisor's revenue with the franchisee's operational readiness.