What factors does Budget consider when estimating the residual values of its 'risk vehicles'?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
Rental vehicles acquired outside of manufacturer repurchase and guaranteed depreciation programs are depreciated based upon their estimated residual values at their expected dates of disposition, after giving effect to anticipated conditions in the used car market. Any adjustments to depreciation are made prospectively.
The estimation of residual values requires us to make assumptions regarding the age and mileage of the car at the time of disposal, as well as expected used vehicle auction market conditions. We regularly evaluate estimated residual values and adjust depreciation rates as appropriate. Differences between actual residual values and those estimated result in a gain or loss on disposal and are recorded as part of vehicle depreciation at the time of sale.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, when estimating the residual values of its 'risk vehicles,' Budget considers the anticipated age of the vehicles, the mileage at the time of disposal, and the expected used vehicle auction market conditions. These 'risk vehicles' are rental vehicles acquired outside of manufacturer repurchase and guaranteed depreciation programs. Budget depreciates these vehicles based on their estimated residual values at the expected disposal date, taking into account the used car market conditions. Any adjustments to depreciation are made prospectively.
Budget regularly evaluates these estimated residual values and adjusts the depreciation rates as needed. Differences between the actual residual values and the estimated values result in a gain or loss upon disposal, which is then recorded as part of vehicle depreciation at the time of the sale. This process involves making assumptions about the future market and vehicle conditions, which can be subject to change and impact the financial results.
For a prospective franchisee, understanding how Budget estimates residual values is crucial because it directly affects the depreciation expense and potential gains or losses on vehicle disposal. Franchisees should inquire about the historical accuracy of these estimates and the factors that could cause significant deviations. Furthermore, it's important to understand how Budget manages and adjusts these estimates to mitigate risks associated with fluctuating used car market conditions and vehicle conditions.