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Fair Value Measurements

6 Months Ended

Jun. 30, 2020

Fair Value Measurements

Fair Value Measurements

9. Fair Value Measurements

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 is described in detail in the 2019 Annual Report on Form 10-K.

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


		As of June 30, 2020												As of December 31, 2019
		Fair Value			Level 1			Level 2			Level 3			Fair Value			Level 1			Level 2			Level 3
Liabilities
Contingent consideration		$	4,650		$	—		$	—		$	4,650		$	5,005		$	—		$	—		$	5,005

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 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 is the assumed franchise sales count for which the forecast assumes between 50-80 franchises sold annually, with a weighted average of approximately 70. The model also assumes a discount rate of approximately 15%. 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 would change the liability by approximately $0.1 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 Condensed Consolidated Statements of Income and recorded as a component of “Accrued liabilities” and “Other liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.

The table below presents a reconciliation of this liability (in thousands):


Balance at January 1, 2020		$	5,005
Fair value adjustments			(355)
Balance at June 30, 2020		$	4,650

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



		June 30, 2020						December 31, 2019
		Carrying Amount			Fair Value Level 2			Carrying Amount			Fair Value Level 2
Senior Secured Credit Facility		$	224,401		$	218,271		$	225,319		$	227,363

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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