In the context of Precision Door Service's financial statements, what are Level 3 inputs based on?
Precision_Door_Service Franchise · 2025 FDDAnswer from 2025 FDD Document
In accordance with FASB ASC 820, Fair Value Measurements*,* certain assets and liabilities carried at fair value are categorized based on the level of judgment associated with the inputs used to measure their fair value. The standard establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels:
Level 1 - Inputs are unadjusted quoted market prices in active markets for identical assets or liabilities at the measurement date.
Level 2 - Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date for the duration of the instrument's anticipated life.
Level 3 - Inputs are unobservable and therefore reflect management's best estimate of the assumptions that market participants would use in pricing the asset or liability.
The tradenames, systems in place, and developed technology were valued using the relief from royalty method and the franchise relationships, customer relationships, national account relationships, and insurance company relationships were valued using the multi-period excess earnings method in the periods acquired, except for those tradenames remeasured in 2023 as a result of impairment testing as discussed above. Rollover equity was valued using a combination of Level 2 observable inputs including EBITDA multiples and comparable public company as well as discounted cash flow analysis of future projections in the period issued. The future projections and estimates used to fair value the assets acquired in acquisitions, as well as those used in our longlived asset and goodwill impairment testing, are considered Level 3 inputs.
Source: Item 21 — Financial Statements (FDD page 91)
What This Means (2025 FDD)
According to Precision Door Service's 2025 Franchise Disclosure Document, Level 3 inputs are unobservable and reflect management's best estimate of the assumptions that market participants would use in pricing an asset or liability. These inputs are part of a hierarchy used to categorize assets and liabilities carried at fair value, as defined by FASB ASC 820, Fair Value Measurements. This hierarchy prioritizes inputs to valuation techniques into three levels, with Level 3 representing the least observable and most subjective inputs.
Specifically, the future projections and estimates used to fair value the assets acquired in acquisitions, as well as those used in long-lived asset and goodwill impairment testing, are considered Level 3 inputs. For example, when Precision Door Service acquires another company or assesses the value of its long-term assets, the projections and estimates used in these valuations rely heavily on management's judgment because they are not directly observable in the market.
For a prospective Precision Door Service franchisee, understanding Level 3 inputs is crucial because it highlights the degree of estimation and judgment involved in the company's financial reporting. While all companies use estimates to some extent, Level 3 inputs represent a higher level of uncertainty. This means that the reported values of certain assets and liabilities may be more sensitive to changes in management's assumptions. Franchisees should consider this when reviewing Precision Door Service's financial statements and assessing the overall financial health of the company.
In summary, Level 3 inputs in Precision Door Service's financial statements are based on management's best estimates and assumptions about what market participants would use to price assets or liabilities, particularly in the context of acquisitions and impairment testing. This reliance on unobservable data introduces a degree of subjectivity and uncertainty into the valuation process, which prospective franchisees should be aware of.