What are some significant assumptions inherent in the relief from royalty valuation methodology used by Checkers?
Checkers Franchise · 2025 FDDAnswer from 2025 FDD Document
Intangible assets not subject to amortization consist of the brands (tradenames) intangible assets. A quantitative impairment test performed on these intangible assets consists of a comparison of their fair value with their carrying value. The Company evaluates the recoverability of intangible assets with an indefinite life in accordance with ASC 350, Intangibles-Goodwill and Other. These assets are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The authoritative guidance allows a company to perform a qualitative or a quantitative assessment of impairment. A company may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test or it could also bypass the qualitative assessment and proceed directly to performing the quantitative impairment test.
If the carrying value of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of intangible assets not subject to amortization are determined using the relief from royalty valuation methodology. Significant assumptions are inherent to this process, including estimates of future revenues generated by the related sales, the discount rate, and the royalty rate. Discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. Royalty rate assumptions are based on projected profitability, actual franchisee agreements and comparable market rates.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 91)
What This Means (2025 FDD)
According to Checkers' 2025 Franchise Disclosure Document, the relief from royalty valuation methodology relies on several key assumptions. These include estimates of future revenues generated by sales at Checkers locations, the discount rate applied to those future revenues, and the royalty rate that Checkers expects to receive. These assumptions are used to determine the fair value of intangible assets like brand names. These valuations are important for financial reporting and assessing potential impairment of these assets. The valuation of intangible assets is prepared by a third-party valuation specialist and incorporates significant unobservable inputs and requires significant judgment and estimates, including the amount and timing of future cash flows.
The discount rate assumptions are based on an assessment of the risk inherent in the respective intangible assets. This means that Checkers must evaluate how risky its brand and related assets are when determining the present value of future earnings. Higher risk typically leads to a higher discount rate, which reduces the estimated fair value. Royalty rate assumptions are based on projected profitability, actual franchisee agreements, and comparable market rates. Checkers considers how profitable its franchisees are expected to be, the terms of existing franchise agreements, and royalty rates charged by similar franchise systems.
For a prospective Checkers franchisee, understanding these assumptions is crucial because they directly impact the perceived value and financial health of the Checkers brand. If the assumptions are overly optimistic, the intangible assets may be overvalued, potentially leading to future impairment charges. This could affect Checkers' financial stability and, consequently, the support and services it can provide to its franchisees. Therefore, it is important for potential franchisees to understand how Checkers arrives at these assumptions and to assess their reasonableness based on their own market research and due diligence.