How does Checkers record the stock-compensation expense for performance-based units?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
The Company records the resulting stock-compensation expense for service-based units ratably over the five-year period and the performance-based units, as well as any expense for unvested service-based Class B Units, upon the occurrence of a Liquidity Event. The stock-based compensation expense recorded is based upon the fair value of the Class B Units which was calculated using the Black-Scholes Model as of the grant date of these awards.
The Company has elected to use the practical expedient under ASU 2021-07 which allows a nonpublic entity to determine the current price input of a share option using the "reasonable application of a reasonable valuation method," which is determined as of the award's measurement date, taking into consideration certain factors as required by the guidance.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the company records stock-compensation expenses for performance-based units upon the occurrence of a Liquidity Event. These performance-based units, along with any expenses for unvested service-based Class B Units, are accounted for at this time. A Liquidity Event, as defined in the Management Incentive Plan, is the sale, or similar transaction, of Topco.
The stock-based compensation expense is based on the fair value of the Class B Units, which is calculated using the Black-Scholes Model as of the grant date of these awards. Checkers uses the practical expedient under ASU 2021-07, allowing a nonpublic entity to determine the current price input of a share option using a reasonable valuation method, determined as of the award's measurement date, considering certain factors.
In simpler terms, Checkers doesn't recognize the expense of these performance-based stock units until a significant event like the sale of the company occurs. This approach differs from service-based units, which are recorded ratably over a five-year period. This means that the actual expense recognized in Checkers' financial statements related to these units can be delayed until such a liquidity event takes place.
For a prospective franchisee, this accounting practice might not directly impact their day-to-day operations. However, understanding how Checkers manages its stock-based compensation can provide insight into the company's financial practices and potential incentives for its management team. It's important to note that events like termination for cause can result in the forfeiture of all vested and unvested shares, as defined in the Management Incentive Plan.