Initial franchise fee definition
/What is the Initial Franchise Fee?
The initial franchise fee is a fee paid to a franchisor in exchange for establishing a franchise relationship, along with the provision of some initial services. Once the fee is paid, the franchisee is legally entitled to use the franchisor’s operating manuals, location selection services, trademark, computer systems, pre-opening support, and other proprietary materials. This fee is paid in a lump sum to the franchisor when a franchise agreement is signed.
Accounting for an Initial Franchise Fee
When a franchisee pays a franchise fee to a franchisor, this payment can be considered an intangible asset. It is permissible for the franchisee to recognize this cost as an asset, since it is an asset acquired from a third party. The franchisee should amortize this asset over its estimated useful life, which is presumed to be the term of the franchise agreement.
For example, Furtive Development enters into a franchise arrangement with Bigelow Burgers, paying an up-front fee of $50,000. Furtive records the payment as follows:
The franchise agreement has a term of 10 years, so Furtive amortizes the fee over 10 years on a straight-line basis. The first-year entry to record this amortization is:
