How does Carls estimate the useful life of restaurants on owned property for impairment analysis?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
Our impairment analyses rely upon a number of estimates, assumptions and measurements with significant Level 2 and Level 3 unobservable inputs (see Note 13), including estimates of future cash flows, assumptions of future same-store sales and projected operating expenses for each of our restaurants over their estimated remaining useful lives in order to evaluate recoverability and estimate fair value. Future cash flows are estimated based upon experience gained, current intentions about refranchising or closing restaurants, recent and expected sales trends, internal plans, the period of time since the restaurant was opened or remodeled, the maturity of the related market and other relevant information. We generally estimate the useful life of restaurants on owned property to be 20 to 40 years and estimate the useful life of restaurants subject to leases to range from the end of the lease term then in effect to the end of such lease term including option periods. If our future cash flows or same-store sales do not meet or exceed our forecasted levels, or if restaurant operating cost increases exceed our forecast and we are unable to recover such costs through price increases, the carrying value of certain of our restaurants may prove to be unrecoverable, and we may incur additional impairment charges in the future.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, when evaluating restaurant-level long-lived assets for impairment, Carls generally estimates the useful life of restaurants on owned property to be between 20 to 40 years. This estimate is used to project future cash flows and assess the recoverability and fair value of the assets. These estimates are part of impairment analyses that rely on several assumptions, including future cash flows, same-store sales, and operating expenses. These figures are considered Level 2 and Level 3 unobservable inputs.
For prospective franchisees, this means that Carls uses a standard range of 20 to 40 years for the useful life of its owned restaurant properties when determining if the value of those assets has been impaired. This estimation is crucial in assessing the financial health and long-term viability of the restaurants. If the estimated future cash flows or sales do not meet the forecasted levels, or if operating costs increase beyond what is expected and cannot be recovered through price increases, the carrying value of the restaurants may be deemed unrecoverable, potentially leading to impairment charges.
It's important to note that these estimates are subject to change based on various factors, including experience gained, intentions regarding refranchising or closures, sales trends, internal plans, the age of the restaurant, market maturity, and other relevant information. Therefore, the actual useful life of a restaurant property could vary, impacting its financial performance and valuation. Franchisees should be aware of these factors and how they might affect the long-term value of their investment.