How are commission or direct costs of acquiring a Sonesta Select Sonesta Essential contract accounted for?

According to Sonesta Select Sonesta Essential's 2025 Franchise Disclosure Document, any commissions or direct costs associated with acquiring a franchise contract are treated as contract acquisition costs. These costs are then amortized on a straight-line basis. This amortization is reflected as a reduction of franchise fees, system fees, reservation fees, and marketing fees within the consolidated statements of comprehensive income (loss) over the entire length of the franchise contract.

In simpler terms, when Sonesta Select Sonesta Essential incurs expenses to secure a new franchisee, such as paying commissions to brokers, these costs are not immediately expensed. Instead, they are capitalized, meaning they are recorded as an asset on the balance sheet. This asset is then gradually expensed over the life of the franchise agreement. The annual expense is shown as a reduction in the revenue Sonesta Select Sonesta Essential receives from franchise fees and other related fees.

This accounting treatment ensures that the costs of acquiring the franchise contract are matched with the revenue generated from that contract over its duration. By amortizing these costs, Sonesta Select Sonesta Essential provides a more accurate picture of its profitability by aligning the expenses with the income they help generate. This approach is consistent with accounting principles that aim to match revenues and expenses in the appropriate periods.