What valuation methodology does Checkers use to determine the fair value of intangible assets not subject to amortization?
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 company uses the relief from royalty valuation methodology to determine the fair value of intangible assets not subject to amortization. These assets primarily consist of the brand's tradenames. This valuation method is used when Checkers performs a quantitative impairment test, which involves comparing the fair value of these intangible assets with their carrying value.
This process involves several significant assumptions. These include estimates of future revenues generated by sales related to the brand, the selection of an appropriate discount rate, and the determination of a suitable royalty rate. The discount rate assumptions are based on an assessment of the risks inherent in the intangible assets themselves. The royalty rate assumptions are informed by projected profitability, existing franchisee agreements, and comparable market rates.
In practical terms, this means that Checkers' valuation of its brand and tradenames relies heavily on projections and market comparisons. For a prospective franchisee, this highlights the importance of understanding the assumptions Checkers makes about future revenue, profitability, and market conditions. These assumptions can significantly impact the perceived value of the brand and, consequently, the financial health of the franchise system. It would be prudent for a potential franchisee to inquire about these assumptions and how they are derived to assess the reasonableness of the valuation.