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Fair Value Measurements
12 Months Ended
Dec. 31, 2019
Fair Value Measurements  
Fair Value Measurements

11. Fair Value Measurements

Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. 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.

A summary of the Company’s liabilities measured at fair value on a recurring basis is as follows (in thousands):

As of December 31, 2019

As of December 31, 2018

    

Fair Value

    

Level 1

    

    

Level 3

Fair Value

    

Level 1

    

Level 2

    

Level 3

Liabilities

Contingent consideration

$

5,005

$

$

5,005

$

5,070

$

$

$

5,070

The Company is required to pay additional purchase consideration totaling 8% of gross receipts collected by Motto each year (the “Revenue Share Year”) through September 30, 2026, with no limitation as to the maximum payout. The annual payment is required to be made within 120 days of the end of each Revenue Share Year. Each Revenue Share Year ends September 30. The fair value of the contingent purchase consideration represents the forecasted discounted cash payments that the Company expects to pay. Increases or decreases in the fair value of the contingent purchase consideration can result from changes in discount rates as well as the timing and amount of forecasted revenues. The forecasted revenue growth assumption that is most sensitive related to assumed franchise sales count for which the forecast assumes between 50 and 80 franchises sold annually. This assumption is based on historical sales and an assumption of growth over time. A 10% reduction in the number of franchise sales would decrease the liability by $0.3 million. A 1% change to the discount rate applied to the forecast changes the liability by approximately $0.2 million. The Company measures this liability each reporting period and recognizes changes in fair value, if any, in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income.

The table below presents a reconciliation of the contingent consideration (in thousands):

Balance at January 1, 2018

$

6,580

Fair value adjustments (a)

(1,289)

Cash payments

(221)

Balance at December 31, 2018

5,070

Fair value adjustments (a)

241

Cash payments

(306)

Balance at December 31, 2019

$

5,005

(a)Fair value adjustments relate to realignment of future franchise sales assumptions to more closely reflect historical sales trends from inception to date.

The Company assesses categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Levels I, II and III during the year ended December 31, 2019.

The following table summarizes the carrying value and estimated fair value of the Senior Secured Credit Facility (in thousands):

December 31, 

December 31,

2019

2018

    

Carrying
Amount

    

Fair Value
Level 2

    

Carrying
Amount

    

Fair Value
Level 2

Senior Secured Credit Facility

$

225,319

$

227,363

$

227,152

$

221,673