How does Sonesta Select Sonesta Essential estimate the fair value of its notes receivable?
Sonesta_Select_Sonesta_Essential Franchise · 2025 FDDAnswer from 2025 FDD Document
accounts receivable, and accounts payable carrying values on our consolidated balance sheets approximate fair value due to the short-term nature of these items.
We estimate the fair value of our notes receivable using expected future receipts discounted at risk-adjusted rates, both of which are Level 3 inputs. Estimated fair values of financial instruments (in thousands) are shown in the table below:
| I | De ce mbe | r 31, 20 | 24 | December 31, 2023 |
|---|
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 84)
What This Means (2025 FDD)
According to Sonesta Select Sonesta Essential's 2025 Franchise Disclosure Document, the company estimates the fair value of its notes receivable by using expected future receipts discounted at risk-adjusted rates. These rates are considered Level 3 inputs within the fair value hierarchy. Level 3 inputs are unobservable and reflect assumptions about what factors market participants would use in pricing the asset or liability, developed using the best information available, including Sonesta Select Sonesta Essential's own data.
For the years ending December 31, 2024, and December 31, 2023, the fair value of notes receivable was estimated to be $40,000 and $42,000 respectively, which matched the carrying amount for both years. This indicates that the risk-adjusted rates used to discount the expected future receipts did not result in a significant difference between the carrying amount and the estimated fair value.
This valuation method relies on internal estimates and assumptions, making it crucial for prospective franchisees to understand the factors influencing these estimates. Franchisees should inquire about the specific risk factors considered and the rationale behind the chosen discount rates to assess the reliability and accuracy of the fair value estimations. Understanding these inputs can provide a clearer picture of the financial health and stability of Sonesta Select Sonesta Essential's notes receivable.