How does Precision Door Service recognize synthetic royalties from affiliated entities?
Precision_Door_Service Franchise · 2025 FDDAnswer from 2025 FDD Document
Synthetic royalties from affiliated entities represent sales-based royalties that are related entirely to our performance obligation under intellectual property license agreements with affiliated entities and are recognized in the period in which the sales occur. These sales-based royalties are variable consideration related to our performance obligations to affiliated entities to maintain the intellectual property being licensed.
Source: Item 21 — Financial Statements (FDD page 91)
What This Means (2025 FDD)
According to Precision Door Service's 2025 Franchise Disclosure Document, synthetic royalties from affiliated entities are treated as sales-based royalties. These royalties are directly linked to Precision Door Service's obligation to maintain the intellectual property licensed to these affiliated entities. The revenue recognition occurs in the period when the sales take place. This means that Precision Door Service recognizes the royalty income at the same time the affiliated entities generate sales related to the licensed intellectual property.
For a prospective Precision Door Service franchisee, this accounting practice might not directly impact their day-to-day operations. However, understanding how the franchisor recognizes revenue, especially from related entities, can provide insights into the overall financial health and stability of the franchise system. It's important to note that these royalties are considered variable consideration, meaning the amount can fluctuate based on the sales performance of the affiliated entities.
In 2024 and 2023, synthetic royalties and master license fees from affiliated entities amounted to $28,241 and $28,705, respectively. This indicates a consistent revenue stream from these related-party transactions. The FDD also mentions that these related parties, some of which are located outside the United States, pay these royalties or license fees for access to and use of Precision Door Service's intellectual property, and these transactions are not denominated in a foreign currency.
Overall, the recognition of synthetic royalties is tied to the performance of affiliated entities and the maintenance of intellectual property, reflecting a common practice in franchise systems where intellectual property licensing is a key component of the business model. Franchisees should be aware of these related-party transactions as they can influence the franchisor's financial performance and strategic decisions.