How does Benjamin Franklin Plumbing account for Class A-2 unit agreements issued to executives?
Benjamin_Franklin_Plumbing Franchise · 2025 FDDAnswer from 2025 FDD Document
ertain stock-based and other incentive compensation with the employees. The Plan provides employees an opportunity to indirectly participate in the distribution of the future profits of the Company.
The awards issued under the 2018 Plan (known as Class B Profit Interest Units) are classified as equity awards. Compensation expense is estimated at the grant date based on an award's fair value as calculated by the Monte-Carlo simulation valuation model. Compensation expense is recognized using the graded vesting attribution method over the requisite service period of five years and is included in stock-based compensation expense on the consolidated statements of comprehensive loss. The Company made a policy election to recognize forfeitures as they occur.
The Company also provides certain executives with ownership interests in the Partnership (known as Class A-2 Units) in exchange for promissory notes and rollover equity. The promissory notes only have recourse against the employee's Class A-2 units, as such they are considered to be a stock option in accordance with GAAP. In addition, the notes have an interest rate that is based on a third party indexed rate, and therefore the stock option is classified as a liability award by the Partnership. Liability classified awards are measured at each reporting date using the intrinsic value model with the related compensation expense recognized in stock-based compensation expense in the consolidated statements of comprehensive loss. Until the stock option is deemed to have been exercised through the repayment of the notes, any distributions on these shares will be deemed compensation expense.
The Company is not the legal obligor of the Class A-2 Unit awards. Therefore, the obligation (liability classified award) remains with the Partnership and any stock-based compensation charges incurred are recognized as additional paid-in capital through a noncash contribution with an offsetting charge to stock-based compensation expense.
In connection with the HELOC Transaction in November 2022, the Company established the Binford Aggregator LP Executive Equity Incentive Plan (the "2022 Plan"), which governs the Class B stock-based incentive compensation granted to certain employees. All remaining units available for issuance under the 2018 Plan and A-2 Units outstanding as of November 2022 were settled upon the close of the HELOC Transaction.
The 2022 Plan provides participants with an opportunity to indirectly participate in the distribution of the future profits of the Company. The awards issued under the Plan (known as Class B Profit Interest Units) are classified as equity awards. Compensation expense is estimated at the grant date based on an award's fair value as calculated by an options pricing model. Compensation expense is recognized using the graded vesting attribution method over the requisite service period of five years and is included in stock-based compensation expense on the consolidated statements of comprehensive loss. The Company made a policy election to recognize forfeitures as they occur.
The Company recognized stock-based compensation expense related to the settlement of the awards issued under the 2018 Plan and Class A-2 Units in connection with the HELOC Transaction. Refer to Note 16 for further details.
Taxes
The Company is subject to federal and state income taxes. Accordingly, an income tax provision has been recognized for federal and state income taxes.
Source: Item 22 — CONTRACTS (FDD pages 87–88)
What This Means (2025 FDD)
According to Benjamin Franklin Plumbing's 2025 Franchise Disclosure Document, Class A-2 Units provided to executives are considered compensation arrangements similar to stock options. These units are issued in exchange for promissory notes and rollover equity. Since the promissory notes are only recourse against the employee's Class A-2 units, they are treated as stock options under GAAP (Generally Accepted Accounting Principles). The interest rate on these notes is based on a third-party index, classifying the stock option as a liability award. These liability-classified awards are re-evaluated at each reporting date using the intrinsic value model, with the related compensation expense recognized as stock-based compensation expense. Distributions on these shares are considered compensation expense until the stock option is exercised through repayment of the notes.
Benjamin Franklin Plumbing specifies that it is not the legal obligor for the Class A-2 Unit awards; the obligation remains with the Partnership. Any stock-based compensation charges are recognized as additional paid-in capital through a noncash contribution, offset by a charge to stock-based compensation expense. In December 2023, Binford Aggregator LP issued a new tranche of A-2 units to certain executives. As of December 31, 2023 and 2024, there were approximately 476,190 A-2 units outstanding. The intrinsic value of this award on the grant date was equal to the value of the award. No stock-based compensation expense was recognized in the years ended December 31, 2024 and 2023, and there were no forfeitures or exercises of these awards during those years.
In 2018, 15,600,000 A-2 units were granted on September 21, and their intrinsic value on the grant date matched the award's value. All Class A-2 units were settled due to the HELOC Transaction, resulting in Benjamin Franklin Plumbing recognizing a gain of $1,080 for the year ended December 31, 2022, in stock-based compensation expense. Of this, $253 was allocated to the Company by specific identification (unit holder), and $827 was allocated based on revenue. This accounting treatment is relevant for prospective franchisees as it provides insight into how Benjamin Franklin Plumbing manages executive compensation and its potential impact on the company's financial statements.