How does My Salon Suite allocate initial franchise fees to performance obligations?
My_Salon_Suite Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company recognizes revenue in accordance with FASB ASC Topic 606 (which addresses revenue from contracts with customers) and Topic 842 (which addresses lease revenue with the adoption of ASC 842 as of January 1, 2022).
The Company has defined its distinct and non-distinct performance obligations required under the terms of the various contracts. For its franchise agreements, the Company believes that portions of certain services, training, site selection and development services, benefit the Franchisee without its use of the license and are therefore considered distinct performance obligations separable from the franchise right. Performance obligations for training, site selection and development services are generally satisfied as of the opening of a franchise center or contract date. To allocate the initial franchise, transfer, and renewal fees to the associated performance obligations, the Company uses an expected cost-plus margin approach to determine the amount of the distinct services obligations. This total distinct amount is recognized upfront, and the remaining non-distinct portion of the total franchise fee is allocated to symbolize intellectual property and recognized over the agreement period. Certain franchise agreements may also include a financing component, but the Company has determined that the total interest amount related to these franchise agreements is immaterial to its consolidated financial statements.
Source: Item 17 — (r) of the FDD and Section 13 of the Franchise Agreement disclose the existence of certain covenants restricting competition to which Franchisee must agree. The Commissioner has held that covenants restricting competition contrary to Section 9-08-06 of the North Dakota Century Code, without further disclosing that such covenants may be subject to this statue, are unfair, unjust, or inequitable within the intent of Section 51-19-09 of the North Dakota Franchise Investment Law. The FDD and the Franchise Agreement are amended accordingly to the extent required by law. (FDD pages 230–274)
What This Means (2025 FDD)
According to the 2025 FDD, My Salon Suite recognizes revenue based on FASB ASC Topic 606 and Topic 842. The company identifies distinct and non-distinct performance obligations within its franchise agreements. My Salon Suite considers services, training, site selection, and development services as distinct performance obligations if they benefit the franchisee independently of the license. These distinct performance obligations are typically satisfied upon the opening of a franchise center or on the contract date.
To allocate initial franchise, transfer, and renewal fees, My Salon Suite uses an expected cost-plus margin approach to determine the value of the distinct service obligations. The total amount attributed to these distinct services is recognized upfront. The remaining portion of the total franchise fee, which represents intellectual property, is considered non-distinct and is recognized over the term of the franchise agreement.
Prospective My Salon Suite franchisees should understand that a portion of their initial franchise fee is immediately recognized as revenue by the company upon satisfying specific performance obligations like training and site selection. The remaining portion, tied to the ongoing use of My Salon Suite's intellectual property, is recognized gradually over the life of the franchise agreement. The FDD also notes that some franchise agreements may include a financing component, but the company has determined that the total interest amount related to these franchise agreements is immaterial to its consolidated financial statements.