Summary of Refranchising and Franchise Acquisitions

8 Months Ended

Sep. 08, 2020

Summary of Refranchising 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 sublease assets/liabilities with a corresponding offset to the gain or loss on the sale of the company-operated restaurants. Sublease assets represent subleases with stated rent above comparable market rents. Sublease assets are amortized to sublease income over the term of the related sublease. Sublease liabilities represent subleases with stated rent below comparable market rents and are amortized to sublease income over the term of the related sublease. Both sublease assets and sublease liabilities arise from the sale of company-operated restaurants to franchisees. 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 franchise revenue as earned.

The Company sold six company-operated restaurants to franchisees during the thirty-six weeks ended September 8, 2020 and 13 company-operated restaurants to franchisees during the thirty-six weeks ended September 10, 2019. The following table summarizes the net loss recognized related to these transactions (dollars in thousands):


	36 Weeks Ended September 8, 2020		36 Weeks Ended September 10, 2019
Company-operated restaurants sold to franchisees	6		13

Proceeds from the sale of company-operated restaurants, net of selling costs	$	2,558	$	2,090
Net assets sold (primarily furniture, fixtures and equipment) ^(a)	(2,086)		(2,051)
Goodwill related to the company-operated restaurants sold to franchisees	(1,196)		(83)
Allocation to deferred franchise fees	(193)		(281)
Sublease assets, net	220		260
Gain on lease termination	40		—

Loss on sale of company-operated restaurants, net ^(b)	$	(657)	$	(65)

^(a) Of the net assets sold during the thirty-six weeks ended September 8, 2020, $0.7 million was included in assets held for sale as of December 31, 2019. The net assets sold during the thirty-six weeks ended September 10, 2019 were all included in assets held for sale as of January 1, 2019.

^(b)Of the loss related to the company-operated restaurants sold during the thirty-six weeks ended September 8, 2020, $0.6 million was previously recognized during the fifty-two weeks ended December 31, 2019 as a fair value adjustment to the assets held for sale balance. The loss on sale of company-operated restaurants is included in loss on disposal of assets and adjustments to assets held for sale, net on the consolidated statements of comprehensive income (loss).

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.

As of December 31, 2019, the Company classified 19 company-operated restaurants as held for sale. During the twelve weeks ended March 24, 2020, the Company sold five of these restaurants as discussed in the Refranchising section above and determined that the remaining 14 company-operated restaurants would not be sold within the next year and therefore reclassified the related long-lived assets back to held for use. The Company reclassified the assets back to held for use at their carrying amount before they were classified as held for sale, adjusted for depreciation expense that would have been recognized had the assets been continuously classified as held for use. As such, the Company recognized a loss of $0.5 million related to the reclassification which is included in loss on disposal of assets and adjustments to assets held for sale, net in the consolidated statement of comprehensive income (loss). As of September 8, 2020, the Company classified the land and building related to a previously closed company-operated restaurant as held for sale and recorded a $0.2 million adjustment to assets held for sale in order to recognize the assets at their estimated net realizable value less estimated costs to sell. The estimated fair value of assets held for sale is based upon Level 2 inputs, which include previous negotiations with a third party. Assets held for sale at September 8, 2020 and December 31, 2019 consisted of the following (in thousands):


	September 8, 2020		December 31, 2019
Land	$	561	$	—
Building	934		—
Other property and equipment	—		4,025
Goodwill	—		4,386
	$	1,495	$	8,411

Franchise Acquisitions

There were no franchise acquisitions during the thirty-six weeks ended September 8, 2020. The Company acquired four franchise-operated restaurants during the thirty-six weeks ended September 10, 2019. 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 (dollars in thousands):


	36 Weeks Ended September 10, 2019
Franchise-operated restaurants acquired from franchisees	4

Goodwill	$	4,302
Restaurant and other equipment and leasehold improvements	660

Operating lease right-of-use assets	2,006
Operating lease liabilities	(2,006)
Unfavorable lease liabilities	(130)
Total consideration	$	4,832

The unfavorable lease liability of $0.1 million was recorded as an adjustment to the respective operating lease right-of-use asset.