How did Management Recruiters account for the acquisitions of the four staffing and placement companies?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
On March 1, 2021, we completed our acquisition of Snelling Staffing and affiliates ("Snelling"). We acquired substantially all of the operating assets and assumed certain liabilities of Snelling for a purchase price of approximately $17.9 million. The Company accounted for this transaction under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including identified intangible assets of $12.7 million and resulting bargain purchase gain of $5.6 million. Of the identified intangible assets acquired, the most significant is the franchise agreements. The Company estimated the fair value of the franchise agreements using the multi-period excess earnings method (income approach), which is a specific application of the discounted-cash-flowmethod that required management to make significant estimates and assumptions related to forecasts of revenue growth projections, including growth rates over the estimated life of the franchise agreements, and selection of royalty rates, discount rates, and methodologies utilized in the valuation model.
We determined the LINK transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the franchise agreements. Accordingly, no pro forma financial information is presented.
At closing, we assigned six of the franchise agreements we purchased in the transaction, all located in California, to the California Purchaser. These six franchisees operate pursuant to a LINK trademark sublicense agreement whereby they pay us 9% of the gross margin of their offices in exchange for a sublicense to utilize the LINK tradename. In conjunction with the transfer of assets acquired in this transaction, we recognized a loss of approximately $1.9 million which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income.
Recruit Media
On October 1, 2021 we completed our acquisition of Recruit Media in accordance with the Stock Purchase Agreement dated October 1, 2021 (the "Recruit Agreement"). Pursuant to the Recruit Agreement, we purchased all of the outstanding shares of Recruit Media for approximately $4.4 million, subject to customary representations and warranties. Recruit Media is an IT company whose intellectual property will allow us to accelerate improvements to our platform.
On January 10, 2022 we entered into a definitive agreement with Temporary Alternatives, Inc. ("Temporary Alternatives") to acquire three locations in west Texas and New Mexico for $5.25 million, inclusive of a prescribed amount of working capital. Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El paso, TX. The acquisition of Temporary Alternatives will expand our national footprint into west Texas and grow our franchise base. The initial acquisition accounting of Temporary Alternatives has not been completed as the transaction was only relatively recently completed.
On January 19, 2022 we entered into a definitive agreement with The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. (collectively, "Dubin") to acquire their staffing operations for $2.4 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the Philadelphia metro area. The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. The initial acquisition accounting of Dubin has not been completed as the transaction was only relatively recently completed.
On January 25, 2022 we entered into a definitive agreement with Northbound Executive Search, LTD. ("Northbound") to acquire their operations for $11.0 million, inclusive of a prescribed amount of working capital. Northbound provides executive placement and short-term consultant services primarily to blue chip clients in the financial services industry. The acquisition of Northbound will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. The initial acquisition accounting of Northbound has not been completed as the transaction was only relatively recently completed.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 65–66)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, the company completed several acquisitions and accounted for them differently based on the nature of the assets acquired. For instance, the acquisition of Snelling Staffing on March 1, 2021, for $17.9 million was accounted for under the acquisition method, allocating the purchase price to assets and liabilities based on their fair values, including $12.7 million in intangible assets and a bargain purchase gain of $5.6 million. The most significant intangible asset was the franchise agreements, valued using the multi-period excess earnings method.
In contrast, the acquisition of LINK Staffing was treated as an asset acquisition because the majority of the fair value was concentrated in the franchise agreements. As a result, Management Recruiters did not present pro forma financial information for this transaction. Additionally, six franchise agreements acquired from LINK, located in California, were assigned to the California Purchaser, operating under a LINK trademark sublicense agreement where they pay Management Recruiters 9% of their gross margin for using the LINK tradename. This transfer of assets led to a loss of approximately $1.9 million, which was recorded under "Other miscellaneous income."
The acquisition of Recruit Media on October 1, 2021, involved purchasing all outstanding shares for approximately $4.4 million. Management Recruiters determined that Recruit Media's intellectual property would help accelerate improvements to their platform. The initial acquisition accounting of Temporary Alternatives, Dubin, and Northbound had not been completed as the transactions were relatively recent.
These different accounting treatments reflect the varying nature of the acquired assets and the specific terms of each acquisition agreement. Prospective franchisees should be aware of how Management Recruiters accounts for acquisitions, as it can impact the company's financial statements and, potentially, the resources and support available to franchisees.