What amount of identified intangible assets, specifically franchise agreements, did Management Recruiters acquire in the Snelling Staffing acquisition?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
to the financial statements*
Critical Audit Matter Description
The Company completed the acquisition of Snelling Staffing for total consideration of $17.9 million on March 1, 2021. 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 identified the valuation of the franchise agreements as a critical audit matter because of the significant estimates and assumptions management made to fair value this asset for purposes of recording the acquisition. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures, including the need to involve fair value specialists, evaluation of the reasonableness of management's forecasts of future revenue, as well as the selection of the royalty rates
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 65–66)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, the company acquired Snelling Staffing on March 1, 2021, for a total consideration of $17.9 million. As part of this acquisition, Management Recruiters allocated $12.7 million to identified intangible assets. The most significant portion of these intangible assets was attributed to franchise agreements.
The valuation of these franchise agreements was considered a critical audit matter due to the significant estimates and assumptions made by Management Recruiters' management to determine the fair value of the assets. These estimates included forecasts of revenue growth projections, growth rates over the estimated life of the franchise agreements, royalty rate selections, discount rates, and methodologies used in the valuation model.
The document highlights that the valuation of franchise agreements required a high degree of auditor judgment and extensive effort during the audit procedures. These procedures included involving fair value specialists and evaluating the reasonableness of management's revenue forecasts, royalty rates, discount rates, and valuation methodologies.