What is the estimated useful life of Carls restaurants on owned property for impairment analysis purposes?
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 the potential impairment of restaurant-level assets, Carls estimates the useful life of its restaurants on owned property to be between 20 and 40 years. This estimate is a key factor in determining the recoverability and fair value of these assets.
This range is used in impairment analyses, which rely on various estimates and assumptions, including future cash flows, same-store sales, and operating expenses. These projections are made for each restaurant over its estimated remaining useful life. Factors influencing these estimates include experience, intentions regarding refranchising or closures, sales trends, internal plans, the restaurant's age since opening or remodeling, and market maturity.
For prospective franchisees, this indicates that Carls considers a fairly long-term horizon for its real estate investments. However, the actual useful life can vary, and if the restaurants' financial performance does not meet forecasted levels, Carls may incur impairment charges, which could affect the overall financial health of the company and potentially impact franchisees. It's important to note that the useful life of restaurants subject to leases is estimated differently, ranging from the end of the current lease term to the end of the lease term including option periods.
This approach is fairly standard in the franchise industry, where long-term assets like real estate are depreciated over their estimated useful lives. Franchisees should be aware of these accounting practices and how they can influence the franchisor's financial statements and decision-making processes.