How does Potbelly Sandwich Works recognize initial franchise fees for accounting purposes?
Potbelly_Sandwich_Works Franchise · 2025 FDDAnswer from 2025 FDD Document
We earn an initial franchise fee, a franchise development agreement fee and ongoing royalty fees and support fees under our franchise agreements. Initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. As such, these franchise fees are recognized over the contractual term of the franchise agreement. We record a contract liability for the unearned portion of the initial franchise fees. Franchise development agreement fees represent the exclusivity rights for a geographical area paid by a third party to develop Potbelly shops for a certain period of time. Franchise development agreement fee payments received by us are recorded in the consolidated balance sheets as accrued expenses or other long-term liabilities, and amortized over the term of the franchise agreement once the shops are opened. These franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement. Royalty fees and the Potbelly Brand Fund contributions are based on a percentage of sales and are recorded as revenue as the fees are earned and become receivable from the franchisee. Other support fees, which primarily include fees for software and technology, are recorded as revenue as the fees are earned and the service is provided to the franchisee. Revenue from support fees are recognized gross of the related expenses since we are the principal in the arrangement to provide those services.
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 recognizes initial franchise fees over the contractual term of the franchise agreement. Because the initial franchise fees are considered highly dependent upon and interrelated with the franchise right granted in the franchise agreement, Potbelly Sandwich Works does not recognize the entire fee as revenue immediately. Instead, they record a contract liability for the unearned portion of the initial franchise fees.
For a prospective franchisee, this means that Potbelly Sandwich Works accounts for the initial franchise fee as revenue gradually over the life of the franchise agreement, rather than all at once when the agreement is signed and the fee is paid. This accounting practice reflects the ongoing rights and services that Potbelly Sandwich Works provides to the franchisee throughout the term of the agreement.
Potbelly Sandwich Works also collects franchise development agreement fees, which represent payments for exclusivity rights in a geographical area. These fees are recorded as accrued expenses or other long-term liabilities and are amortized over the term of the franchise agreement once the shops are opened. Royalty fees and Potbelly Brand Fund contributions, which are based on a percentage of sales, are recorded as revenue as the fees are earned and become receivable from the franchisee. Other support fees, such as those for software and technology, are recorded as revenue as the fees are earned and the service is provided.