Summary of Refranchising, Assets Held for Sale and Franchise Acquisitions

Refranchising

In connection with the sale of company-operated restaurants to franchisees, the Company typically enters into several agreements, in addition to an asset purchase agreement, with franchisees including franchise and lease agreements. The Company typically sells restaurants’ inventory and equipment and retains ownership of the leasehold interest to the real estate to sublease to the franchisee. The Company has determined that its restaurant dispositions usually represent multiple-element arrangements, and as a result, the cash consideration received is allocated to the separate elements based on their relative selling price. Cash consideration generally includes up-front consideration for the sale of the restaurants and franchise fees and future cash consideration for royalties and lease payments. The Company considers the future lease payments in allocating the initial cash consideration received. The Company compares the stated rent under the lease and/or sublease agreements with comparable market rents and the Company records favorable lease assets or unfavorable lease liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. The cash consideration per restaurant for franchise fees is consistent with the amounts stated in the related franchise agreements which are charged for separate standalone arrangements. The Company initially defers and subsequently recognizes the franchise fees over the term of the franchise agreement. Future royalty income is also recognized in revenue as earned.

The Company sold thirteen company-operated restaurants to franchisees during the thirty-six weeks ended September 10, 2019. There was no refranchising activity during the thirty-six weeks ended September 11, 2018. The following table summarizes the related net loss recognized during the thirty-six weeks ended September 10, 2019 (dollars in thousands):



	36 Weeks Ended September 10, 2019
Company-operated restaurants sold to franchisees	13

Proceeds from the sale of company-operated restaurants	$	2,090
Net assets sold (primarily furniture, fixtures and equipment) ^(a)	(2,051		)
Goodwill related to the company-operated restaurants sold to franchisees	(83		)
Allocation to deferred franchise fees	(281		)
Favorable sublease assets, net ^(b)	260
Loss on sale of company-operated restaurants ^(c)	$	(65	)

^(a) Included in assets held for sale at January 1, 2019.

^(b)Comprised of favorable sublease assets of $1.0 million and unfavorable lease liabilities of $0.7 million.

^(c)Included in loss on disposal of assets and adjustments to assets held for sale, net on the consolidated statements of comprehensive (loss) income.

Assets Held for Sale

Assets held for sale includes the net book value of property and equipment for Company-operated restaurants that the Company plans to sell within the next year to new or existing franchisees. Long-lived assets that meet the held for sale criteria are held for sale and reported at the lower of their carrying value or fair value, less estimated costs to sell.

During the thirty-six weeks ended September 10, 2019 the Company reclassified approximately $7.4 million of property and equipment and approximately $14.8 million of goodwill related to the company-operated restaurants the Company plans to sell to assets held for sale, and also recorded an $7.9 million adjustment to the goodwill reclassified as held for sale in order to record the assets held for sale at their estimated net realizable value, net of estimated direct selling costs and estimated sublease assets and liabilities. If the determination is made that the Company no longer expects to sell an asset within the next year, the asset is reclassified out of assets held for sale. The estimated fair value of assets held for sale is based upon Level 2 inputs, which include an asset purchase agreement and negotiated or proposed letters of intent. Assets held for sale at September 10, 2019 and January 1, 2019 consisted of the following (in thousands):



	September 10, 2019		January 1, 2019
Other property and equipment held for sale	$	7,401	$	2,023
Goodwill	6,859		—
Assets held for sale and leaseback	—		12,771
Assets held for sale	$	14,260	$	14,794

Acquisitions

The Company acquired four franchise-operated restaurants during the thirty-six weeks ended September 10, 2019. The Company acquired four franchise-operated restaurants during the thirty-six weeks ended September 11, 2018, of which one closed prior to the completion of the purchase. The Company accounts for the acquisition of franchise-operated restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the market position and future growth potential of the markets acquired and is expected to be deductible for income tax purposes. The following table provides detail of the combined acquisitions for the thirty-six weeks ended September 10, 2019 and September 11, 2018 (dollars in thousands):



	12 Weeks Ended					36 Weeks Ended
	September 10, 2019			September 11, 2018		September 10, 2019			September 11, 2018
Franchise-operated restaurants acquired from franchisees	1			4		4			4

Goodwill	$	1,630		$	893	$	4,302		$	893
Restaurant and other equipment and leasehold improvements	82			798		660			798
Reacquired franchise rights	—			150		—			150
Operating lease right-of-use assets	1,148			—		2,006			—
Operating lease liabilities	(1,148		)	—		(2,006		)	—
Unfavorable lease liabilities ^(a)	—			—		(130		)	—
Total consideration	$	1,712		$	1,841	$	4,832		$	1,841

^(a) The unfavorable lease liabilities of $0.1 million was recorded as an adjustment to the respective operating lease right-of-use asset.