What are the significant assumptions inherent in the relief from royalty valuation methodology used by Checkers?

According to Checkers' 2025 Franchise Disclosure Document, the relief from royalty valuation methodology relies on several key assumptions. These assumptions are critical when estimating the fair value of intangible assets that are not subject to amortization, such as brand tradenames. The accuracy of these assumptions directly impacts the valuation of these assets.

The significant assumptions inherent in this process include estimates of future revenues generated by related sales, the discount rate, and the royalty rate. The estimation of future revenues requires Checkers to forecast sales performance, which can be influenced by market conditions, competition, and consumer preferences. The discount rate reflects the risk associated with the intangible assets, with higher risk typically leading to higher discount rates, which in turn lowers the present value of future cash flows.

Furthermore, the royalty rate assumptions are based on projected profitability, actual franchisee agreements, and comparable market rates. These assumptions are crucial because they determine the hypothetical royalty payment that Checkers would be willing to pay for the use of its own brand, which is then used to estimate the value of the brand. These assumptions are inherently subjective and can significantly impact the overall valuation of Checkers' intangible assets. Prospective franchisees should be aware of these assumptions and their potential impact on the financial statements.

In summary, the relief from royalty valuation methodology used by Checkers involves significant judgment and is sensitive to changes in these key assumptions. Potential franchisees should understand these assumptions and consider how changes in these factors could affect the financial performance and valuation of the company's intangible assets.