What are the three tiers of the fair value hierarchy that Remax follows?
Remax Franchise · 2025 FDDAnswer from 2025 FDD Document
As a basis for considering assumptions, the Company follows a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
- Level 1: Quoted prices for identical instruments in active markets.
- Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations, in which all significant inputs are observable in active markets. The fair value of the Company's debt reflects a Level 2 measurement and was estimated based on quoted prices for the Company's debt instruments in an inactive market.
- Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Level 3 liabilities that are measured at fair value on a recurring basis consist of the Company's contingent consideration related to the acquisition of Motto.
Source: Item 1 — Business and Organization (FDD pages 334–464)
What This Means (2025 FDD)
According to Remax's 2025 Franchise Disclosure Document, the company adheres to a three-tier fair value hierarchy for measuring fair value, which prioritizes the inputs used. Fair value is defined as the exit price that would be received upon selling an asset or transferring a liability in an orderly transaction between market participants. This valuation is market-based and relies on assumptions that market participants would use when pricing the asset or liability. The hierarchy is structured to provide a consistent framework for these measurements.
The first tier, Level 1, is based on quoted prices for identical instruments in active markets. This is the most reliable level as it uses direct, real-time market data for identical assets or liabilities. The second tier, Level 2, includes quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations where all significant inputs are observable in active markets. Remax's debt reflects a Level 2 measurement, estimated from quoted prices for the company's debt instruments in an inactive market.
The third tier, Level 3, involves unobservable inputs where there is little or no market data, requiring Remax to develop its own assumptions. Level 3 liabilities, measured at fair value on a recurring basis, consist of contingent consideration related to the acquisition of Motto. Understanding these levels is crucial for franchisees as it provides insight into how Remax values its assets and liabilities, particularly in the context of financial reporting and potential acquisitions.