How does Stretch Zone recognize ADA fees paid by franchisees?
Stretch_Zone Franchise · 2025 FDDAnswer from 2025 FDD Document
Initial and successor franchise fees, as well as transfer fees, are recognized as revenue on a straight-line basis over the term of the respective franchise agreement. The Company's ADAs generally consist of an obligation to grant geographically exclusive area development rights. These development rights are not distinct from franchise agreements, so upfront fees paid by franchisees for exclusive development rights are deferred and apportioned to each franchise agreement signed by the franchisee. The pro-rata amount apportioned to each franchise agreement is accounted for identically to the initial franchise fee for the first franchise agreement and half of the initial franchise fee for any subsequent franchise agreements. The Company may pay a commission upon the collection of fees under an ADA and or a franchise agreement that is amortized straight-line over the term of the respective franchise agreement.
Source: Item 3 — Franchisee/Debtor's Warranties. (FDD pages 263–364)
What This Means (2025 FDD)
According to Stretch Zone's 2025 Franchise Disclosure Document, the company recognizes revenue from Area Development Agreements (ADAs) by deferring the upfront fees paid by franchisees for exclusive development rights. These fees are then apportioned to each individual franchise agreement signed under the ADA.
For the first franchise agreement under an ADA, the pro-rata amount is accounted for identically to the initial franchise fee. For any subsequent franchise agreements under the same ADA, only half of the initial franchise fee is applied. This means that Stretch Zone spreads the revenue recognition from ADAs over the life of the franchise agreements that result from those development rights.
Furthermore, Stretch Zone may pay a commission upon the collection of fees under an ADA or a franchise agreement. This commission is then amortized on a straight-line basis over the term of the respective franchise agreement. This accounting method ensures that the expenses associated with securing these fees are matched with the revenue they generate over time.
In practical terms, this means a Stretch Zone franchisee with an ADA will not see the entire upfront fee recognized as revenue immediately. Instead, it will be recognized gradually as they open more franchise locations within their designated area. This approach aligns the revenue recognition with the ongoing performance and operation of the individual franchise units.