How does Pump It Up recognize franchise fees as revenue?
Pump_It_Up Franchise · 2025 FDDAnswer from 2025 FDD Document
onthly as stipulated in the franchise agreement.
Brand Fund Fees
The Company collects brand fund fees, as stipulated in the franchise agreement, currently equal to a flat fee or 2% of gross sales over the term of the franchise agreement. Brand fund fees are sales-based that are related entirely to the Company's performance obligation under the franchise agreement and are recognized as franchisee store level sales occur. Brand fund fees are collected weekly or monthly as stipulated in the franchise agreement.
Franchise Fees
The Company requires the entire nonrefundable initial franchise fee to be paid upon execution of a franchise agreement, which typically has an initial term of 10 years. Initial franchise fees are recognized ratably on a straight-line basis over the term of the franchise agreement. The Company's services under the franchise agreement include training of franchisees, site selection, the right to use trademarks and proprietary information, and ongoing operations support. The Company provides no financing to franchisees and offers no guarantees on their behalf. The services provided by the Company are highly interrelated with the franchise license and as such are considered to represent a single performance obligation.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Renewed Franchise Fees
Franchisees have the option to renew the franchise agreement at the end of the initial franchise term.
Source: Item 23 — RECEIPTS (FDD pages 60–225)
What This Means (2025 FDD)
According to Pump It Up's 2025 Franchise Disclosure Document, the company recognizes initial franchise fees as revenue over the term of the franchise agreement. Pump It Up requires the entire nonrefundable initial franchise fee to be paid when the franchise agreement is executed, which typically covers an initial term of 10 years. These initial fees are then recognized ratably on a straight-line basis throughout the 10-year term.
Pump It Up's services under the franchise agreement include franchisee training, site selection assistance, granting the right to use trademarks and proprietary information, and providing ongoing operational support. The FDD states that these services are highly interrelated with the franchise license and are considered a single performance obligation.
Since the initial franchise fees are typically received in cash at or near the beginning of the franchise term, Pump It Up initially records the cash received as a contract liability. This liability is then reduced as the revenue is recognized over time. This accounting practice ensures that revenue recognition aligns with the delivery of services and the ongoing value provided to the franchisee throughout the franchise term. Renewed franchise fees are also recognized ratably on a straight-line basis over the term of the renewed franchise agreement.