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

According to Checkersrallys's 2025 Franchise Disclosure Document, the relief from royalty valuation methodology relies on several key assumptions. These include estimates of future revenues generated by sales, the discount rate applied to those future revenues, and the royalty rate that Checkersrallys could hypothetically charge for the use of its brand. These assumptions are critical because they directly impact the calculated fair value of Checkersrallys's intangible assets, such as its tradenames. If the carrying value of these assets exceeds their estimated fair value, Checkersrallys must recognize an impairment loss, which can affect its financial statements. 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.

For a prospective Checkersrallys franchisee, understanding these assumptions is important because they reflect the franchisor's view of the brand's strength and future potential. Overly optimistic assumptions could mask underlying weaknesses in the business, while overly conservative assumptions might undervalue the brand. Franchisees should consider how these assumptions align with their own expectations for revenue, profitability, and market conditions in their specific territory. Franchisees should also be aware that the valuation of intangible assets involves significant judgment and estimates, as the valuation of intangible assets was 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.

It's also worth noting that Checkersrallys tests these intangible assets for impairment annually, or whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. This means that the assumptions underlying the relief from royalty valuation are subject to change, and any significant changes could trigger an impairment loss. Franchisees should pay attention to any disclosures about impairment testing in Checkersrallys's financial statements, as these disclosures can provide insights into the franchisor's assessment of its brand's value and future prospects. The company may perform a qualitative or 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.