Acquisitions

12 Months Ended

Dec. 31, 2019

ACQUISITIONS

During the years ended December 31, 2019, 2018 and 2017, cash payments, net of cash acquired, related to the acquisitions of businesses and contracts were $14.3 million, $189.9 million and $145.6 million, respectively. Cash payments made during the years ended December 31, 2019, 2018 and 2017 principally relate to the acquisitions of Aaron's-branded franchised stores described below.

The franchisee acquisitions have been accounted for as business combinations and the results of operations of the acquired businesses are included in the Company’s results of operations from their dates of acquisition. The effect of the Company’s acquisitions of businesses and contracts to the consolidated financial statements, other than those acquisitions described below, was not significant for the years ended December 31, 2019, 2018 and 2017.

Franchisee Acquisitions - 2018

During 2018, the Company acquired 152 Aaron's-branded franchised stores operated by franchisees for an aggregate purchase price of $190.2 million, exclusive of the settlement of pre-existing receivables and post-closing working capital settlements.

The acquired operations generated revenues of $183.3 million and $72.0 million and earnings before income taxes of $3.3 million and $0.8 million during the years ended December 31, 2019 and 2018, respectively, which are included in our consolidated statements of earnings for the respective periods.

The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisitions, and restructuring charges incurred under the 2019 restructuring program associated with the closure of a number of acquired stores. The revenues and earnings before income taxes of the acquired operations discussed above have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated as revenue and expenses to the Company from the franchisees during the years ended December 31, 2019 and 2018 had the transaction not been completed.

The 2018 acquisitions are benefiting the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, and enabling the Company to execute its business transformation initiatives on a broader scale. The following table presents summaries of the fair value of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:



(in Thousands)	Final Amounts Recognized as of Acquisition Dates
Purchase Price	$	190,167
Add: Settlement of Accounts Receivable from Pre-existing Relationship	5,405
Add: Working Capital Adjustments	155
Aggregate Consideration Transferred	195,727

Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents	50
Lease Merchandise	59,616
Property, Plant and Equipment	5,568
Operating Lease Right-of-Use Assets¹	4,338
Other Intangibles²	23,322
Prepaid Expenses and Other Assets	1,241
Total Identifiable Assets Acquired	94,135
Accounts Payable and Accrued Expenses	(977		)
Customer Deposits and Advance Payments	(5,156		)
Total Liabilities Assumed	(6,133		)
Goodwill³	107,725
Net Assets Acquired (excluding Goodwill)	$	88,002

¹As of the respective acquisition dates, the Company had not yet adopted ASC 842. As such, there were no operating lease right-of-use assets or operating lease liabilities recognized within the consolidated financial statements at the time of acquisition. The Company recognized operating lease right-of-use assets and operating lease liabilities for the acquired stores as part of the transition to ASC 842 on January 1, 2019. The Company finalized its valuation of assumed favorable and unfavorable real estate operating leases during 2019, which also impacted the valuation of the Company's customer lease contract and customer relationship intangible assets. As a result, measurement period adjustments of $4.3 million were recorded within operating lease right-of-use assets as net favorable, with a corresponding reduction of $1.2 million within other intangibles, net in our consolidated balance sheet. The adjustment also resulted in the recognition of immaterial adjustments to operating expenses and restructuring expenses, net during 2019 to recognize expense that would have been recorded in prior periods had the favorable lease and intangible assets been recorded as of the acquisition date.

² Identifiable intangible assets are further disaggregated in the table set forth below.

³ The total goodwill recognized in conjunction with the franchisee acquisitions, all of which is expected to be deductible for tax purposes, has been assigned to the Aaron’s Business operating segment. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand name in the acquired geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.

The intangible assets attributable to the franchisee acquisitions are comprised of the following:



	Fair Value (in thousands)		Weighted Average Useful Life (in years)
Non-compete Agreements	$	1,872	3.0
Customer Contracts	7,457		1.0
Customer Relationships	9,330		3.0
Reacquired Franchise Rights	4,663		3.9
Total Acquired Intangible Assets¹	$	23,322

¹ Acquired definite-lived intangible assets have a total weighted average life of 2.5 years.

The Company incurred $1.7 million of acquisition-related costs in connection with the franchisee acquisitions, substantially all of which were incurred during 2018. These costs were included in operating expenses in the consolidated statements of earnings.

Franchisee Acquisition - 2017

On July 27, 2017, the Company acquired substantially all of the assets and liabilities of the store operations of a franchisee, SEI, for approximately $140 million in cash. At the time of the acquisition, those store operations served approximately 90,000 customers through 104 Aaron's-branded stores in 11 states primarily in the Northeast. The acquisition is benefiting the Company’s omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, and enabling the Company to execute its business transformation initiatives on a broader scale.

The acquired operations generated revenues of $122.5 million, $129.4 million, and $58.3 million, and earnings before income taxes of $3.6 million, $11.0 million, and $2.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. These revenues and earnings before income taxes are included in our consolidated statements of earnings since the date of acquisition. Included in the earnings before income taxes of the acquired operations are acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisition and restructuring expenses associated with the closure of several acquired stores. The revenues and earnings before income taxes above have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated from SEI, as a franchisee, from July 27, 2017 through December 31, 2019 had the transaction not been completed.

The SEI acquisition has been accounted for as a business combination, and the results of operations of the acquired business is included in the Company’s results of operations from the date of acquisition. The following table presents a summary of the fair value of the assets acquired and liabilities assumed in the SEI franchisee acquisition:



(In Thousands)	Final Amounts Recognized as of Acquisition Date
Purchase Price	$	140,000
Add: Settlement of Accounts Receivable from Pre-existing Relationship	3,452
Less: Reimbursement for Insurance Costs	(100		)
Add: Working Capital Adjustments	188
Consideration Transferred	143,540

Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents	34
Accounts Receivable	1,345
Lease Merchandise	40,941
Property, Plant and Equipment	8,832
Other Intangibles¹	13,779
Prepaid Expenses and Other Assets	440
Total Identifiable Assets Acquired	65,371
Accounts Payable and Accrued Expenses	(6,698		)
Customer Deposits and Advance Payments	(2,500		)
Capital Leases	(4,514		)
Total Liabilities Assumed	(13,712		)
Goodwill²	91,881
Net Assets Acquired (excluding Goodwill)	$	51,659

¹ Identifiable intangible assets are further disaggregated in the table set forth below.

² The total goodwill recognized in conjunction with the SEI acquisition, all of which is expected to be deductible for tax purposes, has been assigned to the Aaron’s Business operating segment. The purchase price exceeded the fair value of the net assets acquired, which resulted in the recognition of goodwill, primarily due to synergies created from the expected future benefits to the Company’s omnichannel platform, implementation of the Company’s operational capabilities, expected inventory supply chain synergies between the Aaron’s Business and Progressive Leasing, and control of the Company’s brand name in new geographic markets. Goodwill also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.

The estimated intangible assets attributable to the SEI acquisition are comprised of the following:



	Fair Value (in thousands)		Weighted Average Useful Life (in years)
Non-compete Agreements	$	1,244	5.0
Customer Lease Contracts	2,154		1.0
Customer Relationships	3,215		2.0
Reacquired Franchise Rights	3,640		4.1
Favorable Operating Leases¹	3,526		11.3
Total Acquired Intangible Assets²	$	13,779

¹Upon the adoption of ASC 842 on January 1, 2019, the Company reclassified the remaining favorable operating lease asset from other intangibles, net to operating lease right-of-use assets within its consolidated balance sheets.

² Acquired definite-lived intangible assets have a total weighted average life of 5.1 years.

The Company incurred $2.1 million of acquisition-related costs in connection with the franchisee acquisition, substantially all of which were incurred during the third quarter of 2017. These costs were included in operating expenses in the consolidated statements of earnings.