What is the Level of assumption used in determining the discount rate for the deferred consideration liability recorded by The Standardx?
The_Standardx Franchise · 2025 FDDAnswer from 2025 FDD Document
n (approximately $374 million) and accounted for the transaction as a business combination as we are the primary beneficiary of the VIE (see Note 4). Upon acquisition, we recorded a $58 million deferred consideration liability at fair value, of which $20 million is recorded in accrued expenses and other current liabilities and $38 million is recorded in other long-term liabilities on our consolidated balance sheet. The fair value was estimated using a discounted future cash flow model and includes assumptions and judgments regarding the discount rate, which is primarily a Level Three assumption. We also recorded a $33 million contingent consideration liability at fair
Source: Item 23 — Receipts (FDD pages 85–132)
What This Means (2025 FDD)
According to The Standardx's 2025 Franchise Disclosure Document, the level of assumption used in determining the discount rate for the deferred consideration liability is primarily Level Three. This classification relates to the Bahia Principe acquisition, where The Standardx recorded a $58 million deferred consideration liability at fair value. Of this, $20 million was recorded in accrued expenses and other current liabilities, while $38 million was recorded in other long-term liabilities on the consolidated balance sheet.
The fair value was estimated using a discounted future cash flow model, which includes assumptions and judgments regarding the discount rate. The FDD specifies that these assumptions and judgments are primarily Level Three assumptions. This means that the inputs used to determine the discount rate are unobservable and reflect The Standardx's own assumptions about what market participants would use in pricing the asset or liability.
For a prospective franchisee, this indicates that the valuation of certain liabilities involves a degree of subjectivity and is based on internal estimates rather than readily available market data. While this is a common practice when observable inputs are not available, it's important for potential investors to understand the assumptions used and how changes in those assumptions could impact The Standardx's financial position. Understanding these valuation methods can provide a clearer picture of the financial strategies and potential risks associated with The Standardx.