Revenue Recognition Rules for Franchises

Franchises operate a little different than the average business. Since an individual buys into the business and has the benefit of brand-name recognition and marketing, franchise financing works into the equation of business revenue. Here’s a closer look at how revenue recognition rules affect franchises and those who choose to work with them. 

Know What the Performance Obligations State

The franchisor must review certain services, like education and training, and determine if these are different from their own brand. This can affect franchisee licensing. For example, training materials that are used by a third party might be considered distinct. In order for items to be classified as this, the item has to provide value to the franchisee. Having these items clearly outlines makes it easier to understand what is part of a revenue fee and what is not. 

Understand What the Contract Involves With Franchise Financing 

Most franchises have agreements that are already written out. It’s generally expected that money involved between both parties will change. The contract should state what each party’s rights are, who the parties are, what the payment terms need to be for this contract and any other important points or obligations that are necessary to honor the contract. The franchisors need to figure out if they’ll have a difficult time collecting on payment since this can influence the terms of the contract. To ensure success, both parties should be familiar with the contract and know what’s expected of them.

Know How Royalties Will Work

Royalties can vary between different franchises. Royalties can either be sales-based, where they are earned but not received, or they are transferred over a period of time. Another typical concept with franchises is controlling how funds are spent, such as a certain amount of money designated to marketing or similar business needs.  

When considering franchise financing, it’s important to understand how this is different from a traditional business. Contracts usually specify when something is distinct or not, and if there are certain performance obligations to meet. Royalties are common when dealing with a franchise, such as those that are sales based, or those that are earned over a period of time. Finally, It’s important to read the contract all the way through and see what each party’s role is, including their expectations. This can ensure a successful partnership between the individual and the franchise they have decided to work with.

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