How does Potbelly Sandwich Works accrue for liabilities?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
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(14) Commitments and Contingencies
We are subject to legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. We accrue for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, our estimates of the outcomes of these matters and its experience in contesting, litigating and settling other similar matters. In the opinion of management, the amount of ultimate liability with respect to those actions should not have a material adverse impact on our financial position or results of operations and cash flows.
Many of the food products we purchase are subject to changes in the price and availability of food commodities, including, among other things, beef, poultry, grains, dairy and produce. We work with our suppliers and uses a mix of forward pricing protocols for certain items including agreements with its supplier on fixed prices for deliveries at a time in the future and agreements on a fixed price with our supplier for the duration of those protocols. We also utilize formula pricing protocols under which the prices we pay are based on a specified formula related to the prices of the goods, such as spot prices.
Source: Item 11 — FRANCHISOR'S ASSISTANCE, ADVERTISING, COMPUTER SYSTEMS, AND TRAINING (FDD pages 37–49)
What This Means (2025 FDD)
According to Potbelly Sandwich Works's 2025 Franchise Disclosure Document, the company accrues for liabilities related to legal proceedings, claims, and other obligations that arise in the ordinary course of business. These liabilities, such as employment-related claims and slip and fall cases, are generally covered by insurance. Potbelly Sandwich Works records an accrual when it is probable that future costs will be incurred and the costs can be reasonably estimated. These accruals are based on current developments, management's estimates of the outcomes, and the company's experience in handling similar matters.
For potential franchisees, this means that Potbelly Sandwich Works has a process in place to account for potential financial obligations resulting from lawsuits, claims, or other liabilities. The company estimates and sets aside funds to cover these costs when it is likely they will occur and can be reasonably estimated. This approach provides transparency into the company's financial health and risk management practices.
Specifically, in June 2024, a class action lawsuit was filed against Potbelly Sandwich Works in Washington state related to the Washington Equal Pay and Opportunities Act. As of December 29, 2024, Potbelly Sandwich Works deemed it probable that a material loss exposure existed and recorded a loss contingency of $1.8 million, which was reflected in general and administrative expenses in the consolidated statements of operations. On January 22, 2025, Potbelly Sandwich Works entered into a Memorandum of Understanding with the Plaintiff to settle the claims, subject to final documentation and court approval. This example illustrates how Potbelly Sandwich Works identifies, assesses, and accounts for potential liabilities that may arise.