# Driven Brands Holdings Inc. (DRVN) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Driven Brands Holdings Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1804745/000180474523000007/drvn-20221231.htm
Accession: 0001804745-23-000007
Filing date: 2023-03-01
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/DRVN/
All MD&A years: /company/DRVN/mda/
Previous year: /company/DRVN/mda/fy2021/ (FY 2021)
Next year: /company/DRVN/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis for Driven Brands Holdings Inc. and Subsidiaries (“Driven Brands”, “the Company”, “we”, “us” or “our”) should be read in conjunction with our consolidated financial statements and the related notes to our consolidated financial statements included elsewhere in this Annual Report. The Company operates and reports financial information on a 52 or 53 week year with the fiscal year ending on the last Saturday in December. Our 2022 fiscal year ending December 31, 2022 consisted of 53 weeks and our fiscal year ending December 25, 2021 consisted of 52 weeks.

Comparative results for the years ending December 25, 2021 and December 26, 2020 are included in “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our previously filed 2021 Annual Report on Form 10-K.

Overview

Driven Brands is the largest automotive services company in North America with a growing and highly-franchised

base of more than 4,800 locations across 49 U.S. states and 13 other countries. Our scaled, diversified platform fulfills an extensive range of core consumer and commercial automotive needs, including paint, collision, glass, repair, car wash, oil change, and maintenance. We have generated consistent recurring revenue and strong operating margins with limited maintenance capital expenditures, which has resulted in significant cash flow generation and capital-efficient growth.

We have driven sustained predictable growth and share gain through our robust pipeline of organic growth complemented by a consistent and repeatable M&A strategy, having completed over 100 acquisitions since 2020. During 2022, we continued to invest in our M&A strategy primarily across our Paint, Collision & Glass, Car Wash and Maintenance segments completing the acquisition of more than 200 locations. Notably, in 2022 we entered the U.S. glass market through our acquisition of AGN and have become the second largest player in the auto glass servicing category. In 2022, we expanded our domestic glass service offerings through 10 business acquisitions comprised of 174 locations.

2022 Highlights and KPIs

•Revenue increased 39% to $2.0 billion, driven by same-store sales and net store growth.

•Consolidated same-store sales increased 14%.

•The Company added 393 net new stores during the year.

•Net income attributable to Driven Brands Holdings Inc. increased 348% to $43.2 million or $0.25 per diluted share.

•Adjusted Net Income attributable to Driven Brands Holdings Inc. increased 41% to $207.9 million or $1.22 per diluted share.

•Adjusted EBITDA increased 42% to $513.8 million.

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Key Performance Indicators

Key measures that we use in assessing our business and evaluating our segments include the following:

System-wide sales. System-wide sales represent the total of net sales for our franchised, independently-operated, and company-operated stores. This measure allows management to better assess the total size and health of each segment, our overall store performance and the strength of our market position relative to competitors. Sales at franchised stores are not included as revenue in our results from operations, but rather, we include franchise royalties and fees that are derived from sales at franchised stores.

Store count. Store count reflects the number of franchised, independently-operated, and company-operated stores open at the end of the reporting period. Management reviews the number of new, closed, acquired, and divested stores to assess net unit growth and drivers of trends in system-wide sales, franchise royalties and fees revenue, company-operated store sales, and independently operated store sales.

Same store sales. Same store sales reflect the change in sales year-over-year for the same store base. We define the same store base to include all franchised, independently-operated, and company-operated stores open for comparable weeks during the given fiscal period in both the current and prior year. This measure highlights the performance of existing stores, while excluding the impact of new store openings and closures and acquisitions and divestitures.

Segment Adjusted EBITDA. We define Segment Adjusted EBITDA as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment, foreign currency transaction related gains or losses, store opening costs, and certain non-recurring and non-core, infrequent or unusual charges. Segment Adjusted EBITDA is a supplemental measure of operating performance of our segments and may not be comparable to similar measures reported by other companies. Segment Adjusted EBITDA is a performance metric utilized by our Chief Operating Decision Maker to allocate resources to and assess performance of our segments. Refer to Note 9 in our consolidated financial statements for a reconciliation of Segment Adjusted EBITDA to income before taxes for the years ended December 31, 2022 and December 25, 2021, respectively.

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The following table sets forth our key performance indicators for fiscal years ended December 31, 2022 and December 25, 2021:

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands, except store count or as otherwise noted)","December 31, 2022","","December 25, 2021"],["System-Wide Sales"],["System-Wide Sales by Segment:"],["Maintenance","$","1,616,100","","","$","1,263,659"],["Car Wash","585,659","","","481,364"],["Paint, Collision & Glass","2,958,971","","","2,403,232"],["Platform Services","445,726","","","391,168"],["Total","$","5,606,456","","","$","4,539,423"],["System-Wide Sales by Business Model:"],["Franchised Stores","$","4,086,891","","","$","3,491,531"],["Company-Operated Stores","1,324,408","","","843,646"],["Independently-Operated Stores","195,157","","","204,246"],["Total","$","5,606,456","","","$","4,539,423"],["Store Count"],["Store Count by Segment:"],["Maintenance","1,645","","","1,505"],["Car Wash","1,111","","","1,058"],["Paint, Collision & Glass","1,846","","","1,648"],["Platform Services","203","","","201"],["Total","4,805","","","4,412"],["Store Count by Business Model:"],["Franchised Stores","2,882","","","2,770"],["Company-Operated Stores","1,202","","","914"],["Independently-Operated Stores","721","","","728"],["Total","4,805","","","4,412"],["Same Store Sales %"],["Maintenance","16.1","%","","24.8","%"],["Car Wash","(3.9","%)","","6.0","%"],["Paint, Collision & Glass","17.1","%","","12.6","%"],["Platform Services","12.6","%","","26.8","%"],["Total consolidated","14.1","%","","17.1","%"],["Segment Adjusted EBITDA"],["Maintenance","$","262,608","","","$","179,073"],["Car Wash","184,717","","","153,065"],["Paint, Collision & Glass","135,447","","","82,731"],["Platform Services","72,538","","","56,954"],["Adjusted EBITDA as a percentage of net revenue by segment"],["Maintenance","32.8","%","","31.0","%"],["Car Wash","31.2","%","","31.4","%"],["Paint, Collision & Glass","33.0","%","","40.5","%"],["Platform Services","36.9","%","","35.2","%"],["Total consolidated","25.3","%","","24.8","%"]]
[[/GREPCENT_TABLE]]

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Reconciliation of Non-GAAP Financial Information

To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use certain non-GAAP financial measures throughout this Annual Report, as described further below, to provide investors with additional useful information about our financial performance, to enhance the overall understanding of our past performance and future prospects and to allow for greater transparency with respect to important metrics used by our management for financial and operational decision-making.

Non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, non-GAAP financial measures may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies. As a result, non-GAAP financial measures should be viewed as supplementing, and not as an alternative or substitute for, our consolidated financial statements prepared and presented in accordance with GAAP.

Adjusted Net Income/Adjusted Earnings per Share. We define adjusted net income as net income calculated in accordance with GAAP, adjusted for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges, amortization related to acquired intangible assets, and the tax effect of the adjustments. Adjusted earnings per share is calculated by dividing Adjusted Net Income by the weighted average shares outstanding. Management believes this non-GAAP financial measure is useful because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, and make strategic decisions.

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The following table provides a reconciliation of Adjusted Net Income to Net Income as defined by GAAP:

Adjusted Net Income/Adjusted Earnings per Share

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands, except per share data)","December 31, 2022","","December 25, 2021"],["Net income","$","43,173","","","$","9,536"],["Acquisition related costs(a)","15,304","","","62,386"],["Non-core items and project costs, net(b)","20,241","","","5,656"],["Straight-line rent adjustment(c)","14,965","","","11,619"],["Equity-based compensation expense(d)","20,583","","","4,301"],["Foreign currency transaction loss, net(e)","17,168","","","20,683"],["Bad debt recovery(f)","(449)","","","(3,183)"],["Trade name impairment(g)","125,450","","","\u2014"],["Asset sale leaseback (gain) loss, impairment and closed store expenses(h)","(29,083)","","","(8,935)"],["Loss on debt extinguishment(i)","\u2014","","","45,576"],["Amortization related to acquired intangible assets(j)","27,059","","","18,551"],["Provision (benefit) for uncertain tax positions(k)","(148)","","","(313)"],["Valuation allowance for deferred tax asset(l)","3,051","","","4,400"],["Adjusted net income before tax impact of adjustments","257,314","","","170,277"],["Tax impact of adjustments(m)","(49,437)","","","(23,282)"],["Adjusted net income","207,877","","","146,995"],["Net loss attributable to non-controlling interest","(15)","","","(96)"],["Adjusted net income attributable to Driven Brands Holdings Inc.","$","207,892","","","$","147,091"],["Weighted average shares outstanding"],["Basic","162,762","","160,684"],["Diluted","166,743","","164,644"],["Earnings per share"],["Basic","$","0.26","","","$","0.06"],["Diluted","$","0.25","","","$","0.06"],["Adjusted earnings per share"],["Basic","$","1.25","","","$","0.90"],["Diluted","$","1.22","","","$","0.88"]]
[[/GREPCENT_TABLE]]

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Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, straight-line rent, equity compensation, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges. Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation. Management believes this non-GAAP financial measure is useful because it is a key measure used by our management team to evaluate our operating performance, generate future operating plans, and make strategic decisions.

The following table provides a reconciliation of Net Income to Adjusted EBITDA:

[[GREPCENT_TABLE]]
[["Adjusted EBITDA"],["","Year Ended"],["","December 31, 2022","","December 25, 2021"],["Net income","$","43,173","","","$","9,536"],["Income tax expense","25,167","","","25,356"],["Interest expense, net","114,096","","","75,914"],["Depreciation and amortization","147,156","","","112,777"],["EBITDA","329,592","","","223,583"],["Acquisition related costs(a)","15,304","","","62,386"],["Non-core items and project costs, net(b)","20,241","","","5,656"],["Straight-line rent adjustment(c)","14,965","","","11,619"],["Equity-based compensation expense(d)","20,583","","","4,301"],["Foreign currency transaction loss, net(e)","17,168","","","20,683"],["Bad debt recovery(f)","(449)","","","(3,183)"],["Trade name impairment(g)","125,450","","","\u2014"],["Asset sale leaseback (gain) loss, impairment and closed store expenses(h)","(29,083)","","","(8,935)"],["Loss on debt extinguishment(i)","\u2014","","","45,576"],["Adjusted EBITDA","$","513,771","","","$","361,686"]]
[[/GREPCENT_TABLE]]

a.Consists of acquisition costs as reflected within the consolidated statement of operations, including legal, consulting and other fees, and expenses incurred in connection with acquisitions completed during the applicable period, as well as inventory rationalization expenses incurred in connection with acquisitions. We expect to incur similar costs in connection with other acquisitions in the future and, under U.S. GAAP, such costs relating to acquisitions are expensed as incurred and not capitalized.

b.Consists of discrete items and project costs, including third-party consulting and professional fees associated with strategic transformation initiatives, as well as a $15 million change in estimate related to the Tax Receivable Agreement that we entered into at the IPO related to the filing of our 2021 tax returns in the fourth quarter of 2022.

c.Consists of the non-cash portion of rent expense, which reflects the extent to which our straight-line rent expense recognized under U.S. GAAP exceeds or is less than our cash rent payments.

d.Represents non-cash equity-based compensation expense.

e.Represents foreign currency transaction gains/losses, net that primarily related to the remeasurement of our intercompany loans. These losses are partially offset by unrealized gains/losses on remeasurement of cross currency swaps and forward contracts.

f.Represents the recovery of previously uncollectible receivables outside of normal operations.

g.Relates to an impairment of certain Car Wash trade names as the Company elected to discontinue their use.

h.Relates to net (gain) loss on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed locations, and lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates.

i.Represents the write-off of debt issuance costs associated with early termination of debt.

j.Consists of amortization related to acquired intangible assets as reflected within depreciation and amortization in the consolidated statements of operations.

k.Represents uncertain tax positions recorded for tax positions, inclusive of interest and penalties.

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l.Represents valuation allowances on income tax carryforwards in certain foreign jurisdictions that are not more likely than not to be realized.

m.Represents the tax impact of adjustments associated with the reconciling items between net income and Adjusted Net Income, excluding the provision for uncertain tax positions and valuation allowance for certain deferred tax assets. To determine the tax impact of the deductible reconciling items, we utilized statutory income tax rates ranging from 9% to 36%, depending upon the tax attributes of each adjustment and the applicable jurisdiction.

Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 25, 2021

To facilitate review of our results of operations, the following tables set forth our financial results for the periods indicated. All information is derived from the consolidated statements of operations. Certain percentages presented in this section have been rounded to the nearest whole number, therefore, totals may not equal the sum of the line items in the tables below.

For the year ended December 31, 2022, we recognized Net Income of $43 million, or $0.26 per diluted share, compared to a Net Income of $10 million, or $0.06 per diluted share, for the year ended December 25, 2021. This increase in Net Income was primarily due to an increase in operating profit, driven by a 39% increase in revenue as a result of same store sales and organic growth, increased growth from the U.S. glass business acquisitions, and continued car wash acquisitions in 2022, as well as $46 million due to the non-recurrence of debt extinguishment costs associated with the settlement of the Car Wash Senior Credit Facilities in 2021, and $56 million due to acquisition costs incurred in 2021 related to the purchase of AGN. These increases were partially offset by a $125 million non-cash impairment charge related to the change in intended use of certain existing Car Wash trade names migrating to the Take 5 Car Wash brand, a $91 million increase in selling, general and administrative expenses related to higher professional fees, infrastructure, and other operating costs, including $15 million relating to the Tax Receivable Agreement, a $38 million increase in interest expense related to a higher average balance outstanding and an increased weighted average interest rate due to interest rate increases throughout 2022.

Adjusted Net Income increased $61 million, or 41%, for the year ended December 31, 2022 to $208 million, compared to $147 million for the year ended December 25, 2021. The increase in Adjusted Net Income was primarily due to an increase in revenue related to same store sales and organic growth and increased unit growth from the U.S. glass business acquisitions and continued car wash acquisitions in 2022, partially offset by higher operating, interest, and income tax expenses associated with growth. See Note 3 to our consolidated financial statements for additional information about acquisitions.

Adjusted EBITDA was $514 million for the year ended December 31, 2022, an increase of $152 million, or 42%, compared to Adjusted EBITDA of $362 million for the year ended December 25, 2021. Adjusted Net Income and Adjusted EBITDA are non-GAAP financial measures of performance. For a discussion of our use of these non-GAAP measures and a reconciliation from Net Income to Adjusted Net Income and Adjusted EBITDA, see above for reconciliations of non-GAAP financial information.

Revenue

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","% of Net Revenues","","December 25, 2021","","% of Net Revenues"],["Franchise royalties and fees","$","171,734","","","8.4","%","","$","144,413","","","9.8","%"],["Company-operated store sales","1,324,408","","","65.1","%","","843,646","","","57.5","%"],["Independently-operated store sales","195,157","","","9.6","%","","204,246","","","13.9","%"],["Advertising contributions","87,750","","","4.3","%","","75,599","","","5.2","%"],["Supply and other revenue","254,145","","","12.5","%","","199,376","","","13.6","%"],["Total revenue","$","2,033,194","","","100.0","%","","$","1,467,280","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Franchise Royalties and Fees

Franchise royalties and fees increased $27 million, or 19%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Maintenance, Paint, Collision & Glass, and Platform Services franchise royalties and fees increased by 25%, 18%, and 15%, respectively. This increase was primarily due to a $595 million, or 17%, increase in franchised system-wide sales aided by an increase in same store sales and the additional 112 franchised stores.

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Company-Operated Store Sales

Company-operated store sales increased $481 million, or 57%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Maintenance, Car Wash, and Paint, Collision & Glass company-operated store sales increased by $189 million, $113 million, and $178 million, respectively. Company operated store sales increased due to the addition of 288 company-operated stores year-over-year and same store sales growth. Growth in company-operated stores was driven primarily by the acquisition of 10 glass businesses, which had 174 stores in aggregate, and continued car wash tuck-in acquisitions. The acquisition of the glass businesses generated $157 million of sales in 2022.

Independently-Operated Store Sales

Independently-operated store sales (comprised entirely of the international car wash locations) decreased $9 million, or 4%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, primarily as a result of store closures and a decrease in same store sales due to unfavorable currency translation.

Advertising Contributions

Advertising contributions increased by $12 million, or 16%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, due to an increase in franchised system-wide sales of approximately $595 million, or 17%. Our franchise agreements typically require the franchisee to pay continuing advertising fees based on a percentage of franchisee gross sales.

Supply and Other Revenue

Supply and other revenue increased $55 million, or 27%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Supply and other revenue increased across all segments due to an increase in system wide sales. Supply and other revenue also increased due to an overall increase in franchise stores in the Maintenance segment and increased rebates in the Paint, Collision & Glass segment.

Operating Expenses

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","% of Net Revenues","","December 25, 2021","","","","% of Net Revenues"],["Company-operated store expenses","$","812,262","","","40.0","%","","$","515,837","","","","","","","35.2","%"],["Independently-operated store expenses","107,940","","","5.3","%","","114,115","","","","","","","7.8","%"],["Advertising expenses","87,986","","","4.3","%","","74,765","","","","","","","5.1","%"],["Supply and other expenses","145,481","","","7.2","%","","112,318","","","","","","","7.7","%"],["Selling, general, and administrative expenses","383,478","","","18.9","%","","292,263","","","","","","","19.9","%"],["Acquisition costs","15,304","","","0.8","%","","62,386","","","","","","","4.3","%"],["Store opening costs","2,878","","","0.1","%","","2,497","","","","","","","0.2","%"],["Depreciation and amortization","147,156","","","7.2","%","","112,777","","","","","","","7.7","%"],["Trade name impairment charge","125,450","","","6.2","%","","\u2014","","","","","","","\u2014","%"],["Asset impairment charges","5,655","","","0.3","%","","3,257","","","","","","","0.2","%"],["Total operating expenses","$","1,833,590","","","90.2","%","","$","1,290,215","","","","","","","87.9","%"]]
[[/GREPCENT_TABLE]]

Company-Operated Store Expenses

Company-operated store expenses increased $296 million, or 57%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. This increase in expenses was commensurate with the increase in revenue from the addition of 288 company-operated stores during fiscal year 2022 as well as same store sales growth. Company-operated store expenses increased at the same rate as company-operated store revenue.

Independently-Operated Store Expenses

Independently-operated store expenses (comprised entirely of the international car wash locations) decreased $6 million, or 5%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. This was commensurate with the decrease in Independently-operated store sales primarily due to unfavorable foreign currency translation. Independently-

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operated store expenses decreased at a higher rate than Independently-operated store sales due to effective cost management and operational leverage.

Advertising Expenses

Advertising expenses increased $13 million, or 18%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. This increase aligns with the increase to advertising fund revenue. Advertising fund expenses generally trend consistent with advertising fund contributions.

Supply and Other Expenses

Supply and other expenses increased $33 million, or 30%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. This increase was primarily due to an increase in franchise system-wide sales that resulted in increased product purchases.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $91 million, or 31%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. This increase was primarily due to increased employee compensation and other employee related expenses due to increased headcount primarily from 2022 car wash and glass company-operated store acquisitions, an additional $15 million relating to a change in estimate for the Tax Receivable Agreement, $16 million related to stock compensation, travel and infrastructure costs, as well as increased legal, professional, and audit fees. The remaining increase is a result of incremental costs to support organic growth.

Acquisition Costs

Acquisition costs decreased $47 million, or 75%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Acquisition costs decreased primarily due to the non-recurrence of $56 million in transaction costs related to the acquisition of AGN on December 30, 2021 (See Note 3), which were incurred in 2021, partially offset by increased acquisition activity in the current year compared to the prior year.

Store Opening Costs

Store opening costs increased less than $1 million, or 15%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, due to an increase in company operated new store openings and conversions of acquired stores to the Take 5 Oil brand.

Depreciation and Amortization

Depreciation and amortization expense increased $34 million, or 7%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, due to additional property and equipment and definite-lived intangible assets recognized as a result of recent acquisitions and additional capitalized expenditures incurred related to growth, such as new store openings.

Trade Name Impairment Charges

The Company acquired a number of car wash businesses over the past two years and determined a fair value of each of the associated intangibles, including trademarks and customer relationships. During 2022, the Company made the strategic decision to rebrand the majority of its U.S. car wash locations to operate under the brand name “Take 5 Car Wash”, and therefore discontinue the use of certain car wash trade names that had indefinite lives. As a result, the Company recognized a $125 million non-cash impairment charge.

Asset Impairment Charges

Asset impairment charges increased $2 million, or 74%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Asset impairment charges related to the impairment of certain fixed assets and operating lease right-of-use assets, primarily at closed store locations.

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Interest Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","% of Net Revenues","","December 25, 2021","","% of Net Revenues"],["Interest expense, net","$","114,096","","","5.6","%","","$","75,914","","","5.2","%"]]
[[/GREPCENT_TABLE]]

Interest expense, net increased $38 million, or 50%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, as a result of higher average debt outstanding and interest rates in the current period. In the fourth quarter of 2022, we issued $365 million in borrowings under the Series 2022-1 Class A-2 Securitization Senior notes and in the fourth quarter of 2021 we issued $950 million in borrowings under the Series 2021-1 Securitization Senior Notes and as well as Term Loan Facility borrowings, both of which impacted the average outstanding debt in 2022 compared to 2021. In addition, borrowings in the current year were impacted by rate increases throughout the year.

Loss on Foreign Currency Transactions, Net

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","% of Net Revenues","","December 25, 2021","% of Net Revenues"],["Loss on foreign currency transactions, net","$","17,168","","","0.8","%","","$","20,683","","1.4","%"]]
[[/GREPCENT_TABLE]]

The loss on foreign currency transactions for the year ended December 31, 2022 was primarily comprised of a $16 million net remeasurement loss on our non-U.S. dollar entities, including third party long-term debt and intercompany notes.

The loss on foreign currency transactions for the year ended December 25, 2021 was primarily comprised of a $25 million loss associated with the remeasurement of our 2020-1 Senior Notes and foreign inter-company notes, partially offset by gains incurred on cross currency swaps and forward contracts associated with these instruments that are not designated as hedging instruments.

Loss on Debt Extinguishment

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","% of Net Revenues","","December 25, 2021","","% of Net Revenues"],["Loss on debt extinguishment","$","\u2014","","","\u2014","%","","$","45,576","","","3.1","%"]]
[[/GREPCENT_TABLE]]

The loss on debt extinguishment of $46 million for the year ended December 25, 2021 was due to the write-off of remaining unamortized debt discount associated with settlement of the Car Wash Senior Credit Facilities.

Income Tax Expense

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","% of Net Revenues","","December 25, 2021","","% of Net Revenues"],["Income tax expense","$","25,167","","","1.2","%","","$","25,356","","","1.7","%"]]
[[/GREPCENT_TABLE]]

Income tax expense decreased by $0.2 million, or 1%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. The effective income tax rate for the year ended December 31, 2022 was 36.8% compared to 72.7% for the year ended December 25, 2021. The decrease in the income tax expense from 2021 to 2022 was primarily driven by non-recurring unfavorable transaction costs in 2021, partially offset by an increase in pretax income and the impact of Global Intangible Low-Taxed Income (“GILTI”) in the current year.

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Segment Results of Operations for the Year Ended December 31, 2022 Compared to the Year Ended December 25, 2021

We assess the performance of our segments based on Segment Adjusted EBITDA, which is defined as earnings before interest expense, net, income tax expense, and depreciation and amortization, with further adjustments for acquisition-related costs, straight-line rent, equity compensation, store opening costs, loss on debt extinguishment and certain non-recurring, non-core, infrequent or unusual charges. Segment Adjusted EBITDA is a supplemental measure of the operating performance of our segments and may not be comparable to similar measures reported by other companies. Also, shared services costs are not allocated to these segments, as further described in Note 9 to the consolidated financial statements.

Maintenance

[[GREPCENT_TABLE]]
[["","Year Ended","","2022","","2021"],["(in thousands)","December 31, 2022","","December 25, 2021","","% Net Revenue For Segment","","% Net Revenue For Segment"],["Franchise royalties and fees","$","45,046","","","$","35,932","","","5.6","%","","6.2","%"],["Company-operated store sales","692,947","","","503,719","","","86.7","%","","87.3","%"],["Supply and other revenue","61,869","","","37,425","","","7.7","%","","6.5","%"],["Total revenue","$","799,862","","","$","577,076","","","100.0","%","","100.0","%"],["Segment Adjusted EBITDA","$","262,608","","","$","179,073","","","32.8","%","","31.0","%"],["System-Wide Sales","","","","","Change"],["Franchised stores","$","923,153","","","$","759,940","","","$","163,213","","","21.5","%"],["Company-operated stores","692,947","","","503,719","","","189,228","","","37.6","%"],["Total System-Wide Sales","$","1,616,100","","","$","1,263,659","","","352,441","","","27.9","%"],["Store Count","","","","","Change"],["Franchised stores","1,052","","","962","","","90","","","9.4","%"],["Company-operated stores","593","","","543","","","50","","","9.2","%"],["Total Store Count","1,645","","","1,505","","","140","","","9.3","%"],["Same Store Sales %","16.1","%","","24.8","%"]]
[[/GREPCENT_TABLE]]

Maintenance revenue increased $223 million, or 39%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Franchise royalties and fees increased by $9 million, or 25%, primarily due to the $163 million increase in franchise system-wide sales driven by same store sales growth and an increase of 90 franchised stores. Company-operated store sales increased $189 million, or 38%, due to an increase in same store sales growth and an increase of 50 company-operated stores at Take 5 Oil. Supply and other revenue increased by $24 million, or 65%, primarily due to an increase in franchise store system wide sales related to Take 5 Oil driven by same store sales growth, an increase in franchise store count, and an increase in oil prices.

Maintenance Segment Adjusted EBITDA increased $84 million, or 47%, for the year ended December 31, 2022, as compared to the year ended December 25, 2021, primarily due to revenue growth as well as cost management and operational leverage.

49

Car Wash

[[GREPCENT_TABLE]]
[["","Year Ended","","2022","","2021"],["(in thousands)","December 31, 2022","","December 25, 2021","","% Net Revenue For Segment","","% Net Revenue For Segment"],["Company-operated store sales","$","390,502","","","$","277,118","","","65.9","%","","56.9","%"],["Independently-operated store sales","195,157","","","204,246","","","32.9","%","","41.9","%"],["Supply and other revenue","7,061","","","6,071","","","1.2","%","","1.2","%"],["Total revenue","$","592,720","","","$","487,435","","","100.0","%","","100.0","%"],["Segment Adjusted EBITDA","$","184,717","","","$","153,065","","","31.2","%","","31.4","%"],["System-Wide Sales","","","","","Change"],["Company-operated stores","$","390,502","","","$","277,118","","","$","113,384","","","40.9","%"],["Independently-operated stores","195,157","","","204,246","","","(9,089)","","","(4.5)","%"],["Total System-Wide Sales","$","585,659","","","$","481,364","","","$","104,295","","","21.7","%"],["Store Count","","","","","Change"],["Company-operated stores","390","","","330","","","60","","","18.2","%"],["Independently-operated stores","721","","","728","","","(7)","","","(1.0)","%"],["Total Store Count","1,111","","","1,058","","","53","","","5.0","%"],["Same Store Sales %","(3.9)","%","","6.0","%"]]
[[/GREPCENT_TABLE]]

Car Wash segment revenue increased $105 million, or 22%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Company-operated store sales increased $113 million, or 41%, primarily due to U.S. acquisitions and new store openings in 2022. Independently-operated store sales decreased $9 million, or 4%, primarily as a result of store closures and a decrease in same store sales due to unfavorable currency translation.

Car Wash segment Adjusted EBITDA increased by $32 million, or 21%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, primarily driven by increased revenue from acquisitions and new store openings in the year, partially offset by increased operating costs, primarily relating to compensation, rent, and utilities as well as decreased same store sales due to unfavorable impact to foreign exchange.

50

Paint, Collision & Glass

[[GREPCENT_TABLE]]
[["","Year Ended","","2022","","2021"],["(in thousands)","December 31, 2022","","December 25, 2021","","% Net Revenue For Segment","","% Net Revenue For Segment"],["Franchise royalties and fees","$","93,026","","","$","79,125","","","22.7","%","","38.8","%"],["Company-operated store sales","235,924","","","57,804","","","57.4","%","","28.3","%"],["Supply and other revenue","81,714","","","67,272","","","19.9","%","","32.9","%"],["Total revenue","$","410,664","","","$","204,201","","","100.0","%","","100.0","%"],["Segment Adjusted EBITDA","$","135,447","","","$","82,731","","","33.0","%","","40.5","%"],["System-Wide Sales","","","","","Change"],["Franchised stores","$","2,723,047","","","$","2,345,428","","","$","377,619","","","16.1","%"],["Company-operated stores","235,924","","","57,804","","","178,120","","","308.1","%"],["Total System-Wide Sales","$","2,958,971","","","$","2,403,232","","","$","555,739","","","23.1","%"],["Store Count","","","","","Change"],["Franchised stores","1,628","","","1,608","","","20","","","1.2","%"],["Company-operated stores","218","","","40","","","178","","","445.0","%"],["Total Store Count","1,846","","","1,648","","","198","","","12.0","%"],["Same Store Sales %","17.1","%","","12.6","%"]]
[[/GREPCENT_TABLE]]

Paint, Collision & Glass revenue increased $206 million, or 101%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Franchised royalties and fees increased $14 million, or 18%, due to the $378 million increase in franchise system-wide sales from same store sales growth and an increase of 20 franchised stores. Company operated store revenue increased $178 million, or 308%, primarily due to glass acquisitions with revenue of $157 million as well as full year revenue for 10 CARSTAR franchise sites acquired in the fourth quarter of 2021 resulting in an additional $7 million in revenue compared to prior year, as well as same store sales growth. Supply and other revenue increased $14 million, or 21%, primarily due to same store sales growth and higher franchise income resulting from an increase in system wide sales.

Paint, Collision & Glass Segment Adjusted EBITDA increased $53 million, or 64%, for the year ended December 31, 2022, as compared to the year ended December 25, 2021, mainly due to revenue growth from acquisitions and same store sales growth as well as cost management and operational leverage, partially offset by sales mix between franchise and company-operated stores.

51

Platform Services

[[GREPCENT_TABLE]]
[["","Year Ended","","2022","","2021"],["(in thousands)","December 31, 2022","","December 25, 2021","","% Net Revenue For Segment","","% Net Revenue For Segment"],["Franchise royalties and fees","$","33,662","","","$","29,356","","","17.1","%","","18.1","%"],["Company-operated store sales","5,035","","","5,005","","","2.6","%","","3.1","%"],["Supply and other revenue","157,676","","","127,413","","","80.3","%","","78.8","%"],["Total revenue","$","196,373","","","$","161,774","","","100.0","%","","100.0","%"],["Segment Adjusted EBITDA","$","72,538","","","$","56,954","","","36.9","%","","35.2","%"],["System-Wide Sales","","","","","Change"],["Franchised stores","$","440,691","","","$","386,163","","","$","54,528","","","14.1","%"],["Company-operated stores","5,035","","","5,005","","","30","","","0.6","%"],["Total System-Wide Sales","$","445,726","","","$","391,168","","","$","54,558","","","13.9","%"],["Store Count","","","","","Change"],["Franchised stores","202","","","200","","","2","","","1.0","%"],["Company-operated stores","1","","","1","","","\u2014","","","\u2014","%"],["Total Store Count","203","","","201","","","2","","","1.0","%"],["Same Store Sales %","12.6","%","","26.8","%"]]
[[/GREPCENT_TABLE]]

Platform Services revenue increased $35 million, or 21%, for the year ended December 31, 2022, compared to the year ended December 25, 2021. Franchise royalties and fees increased $4 million, or 15%, as a result of a $55 million increase in franchise system-wide sales driven by same store sales growth. Supply and other revenue increased $30 million, or 24%, driven by an increase in franchise system-wide sales that resulted in increased product purchases.

Platform Services Segment Adjusted EBITDA increased $16 million, or 27%, for the year ended December 31, 2022, compared to the year ended December 25, 2021, driven primarily by revenue growth, cost management, and operational leverage.

Financial Condition, Liquidity and Capital Resources

Sources of Liquidity and Capital Resources

Cash flow from operations, supplemented with our long-term borrowings and revolving credit facilities, have been sufficient to fund our operations while allowing us to make strategic investments to grow our business. We believe that our sources of liquidity and capital resources will be adequate to fund our operations, acquisitions, company-operated store development, other general corporate needs, and the additional expenses we expect to incur for at least the next twelve months. We expect to continue to have access to the capital markets at acceptable terms. However, this could be adversely affected by many factors including macroeconomic factors, a downgrade of our credit rating, or a deterioration of certain financial ratios.

Driven Brands Funding, LLC (the “Issuer”), a wholly owned subsidiary of the Company, is subject to certain quantitative covenants related to debt service coverage and leverage ratios in connection with the Securitization Senior Notes. The Term Loan Facility and Revolving Credit Facility also have certain qualitative covenants. As of December 31, 2022 and December 25, 2021, the Company and its issuing subsidiaries were in compliance with all covenants under its agreements.

As of December 31, 2022, the Company had total liquidity of $618 million, which included $227 million in cash and cash equivalents and $391 million of undrawn capacity on its variable funding securitization senior notes and revolving credit facility. This does not include the additional $135 million Series 2022 Class A-1 Notes that expand our variable funding note borrowing capacity when the company elects to exercise it, assuming certain conditions continue to be met.

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Contractual Obligations

In addition to our liquidity and capital resources, we have significant contractual obligations and commitments as December 31, 2022 relating to the following:

•Long-term debt and interest obligations - As of December 31, 2022 our outstanding debt balance was $2,784 million. See Note 8 to our consolidated financial statements for additional details regarding the timing of expected future principal payments. Interest on long-term debt is calculated based on debt outstanding and interest rates in effect on December 31, 2022, taking into account scheduled maturities and amortization payments. As of December 31, 2022, we estimate interest payment of $134 million due in 2023 and $488 million due in 2024 and thereafter.

•Operating lease commitments - The company and its subsidiaries have non-cancelable operating lease agreements for the rental of office space, company-operated shops, and office equipment. As of December 31, 2022, our remaining contractual commitments for operating leases were $1,942 million. See Note 10 to our consolidated financial statements regarding the timing of expected future payments.

•Sublease rental - The Company’s subsidiaries enter into certain lease agreements with owners of real property to sublet the leased premises to its franchisees. As of December 31, 2022, our remaining contractual commitments for sublease rentals were $32 million. See Note 10 to our consolidated financial statements regarding the timing of expected future payments.

Cash Flows

The following table illustrates the main components of our cash flows:

[[GREPCENT_TABLE]]
[["","Year Ended"],["(in thousands)","December 31, 2022","","December 25, 2021"],["Net cash provided by operating activities","$","197,176","","","$","283,827"],["Net cash used in investing activities","(840,280)","","","(814,936)"],["Net cash provided by financing activities","343,368","","","885,536"],["Effect of exchange rate changes on cash","(2,283)","","","558"],["Net change in cash, cash equivalents, restricted cash, and restricted cash included in advertising fund assets","$","(302,019)","","","$","354,985"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities was $197 million for the year ended December 31, 2022 compared to net cash provided by operating activities of $284 million for the year ended December 25, 2021. The decrease was primarily due to a $56 million payment of transaction costs associated with the AGN acquisition paid in 2022 and $37 million of additional interest expense paid in the current year, partially offset by an increase in operating income.

Investing Activities

Net cash used in investing activities was $840 million for the year ended December 31, 2022 compared to $815 million for the year ended December 25, 2021, primarily resulting from an increase in capital expenditures of $275 million, partially offset by an increase in proceeds from sale-leaseback transactions of $190 million, an increase in proceeds received from disposal of businesses and fixed assets of $23 million, and a decrease in cash paid for acquisitions of $38 million.

Capital expenditures in all periods were primarily related to building new company-operated stores, remodeling existing and acquired company-operated stores, maintaining our existing store base, and executing on technology initiatives.

Financing Activities

Net cash provided by financing activities was $343 million for the year ended December 31, 2022 compared to $886 million for the year ended December 25, 2021. Financing activities for the year ended December 31, 2022 primarily related to $341 million for net debt proceeds and debt related activity. Financing activities for the year ended December 25, 2021 primarily related to $761 million in proceeds from our initial public offering, net of underwriting discounts and $167 million for net debt proceeds and debt related activity, partially offset by $43 million in repurchases of common stock.

53

Tax Receivable Agreement

We expect to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s initial public offering, which we therefore attribute to our existing stockholders. We expect that these tax benefits (i.e., the Pre-IPO and IPO-Related Tax Benefits) will reduce the amount of tax that we and our subsidiaries would otherwise be required to pay in the future. We have entered into an Tax Receivable Agreement which provides our Pre-IPO stockholders with the right to receive payment by us of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local and provincial income tax that we and our subsidiaries actually realize as a result of the utilization of the Pre-IPO and IPO-Related Tax Benefits. The Company has recorded a total liability of $171 million as of December 31, 2022 of which $53 million and $118 million are recorded under current and non-current tax receivable agreement liabilities on our consolidated balance sheets, respectively. As of December 25, 2021, the company recorded a total liability of $156 million of which $24 million and $132 million were recorded under current and non-current tax receivable agreement liabilities on our consolidated balance sheet, respectively. The change from prior year relates to changes in the estimated liability based on tax returns filed by the Company in the current year.

For purposes of the Tax Receivable Agreement, cash savings in income tax will be computed by reference to the reduction in the liability for income taxes resulting from the utilization of the Pre-IPO and IPO-Related Tax Benefits. The term of the Tax Receivable Agreement commenced upon the effective date of the Company’s initial public offering and will continue until the Pre-IPO and IPO-Related Tax Benefits have been utilized, accelerated or expired.

Because we are a holding company with no operations of our own, our ability to make payments under the Tax Receivable Agreement is dependent on the ability of our subsidiaries to make distributions to us. The securitized debt facility may restrict the ability of our subsidiaries to make distributions to us, which could affect our ability to make payments under the Tax Receivable Agreement. To the extent that we are unable to make payments under the Tax Receivable Agreement because of restrictions under our outstanding indebtedness, such payments will be deferred and will generally accrue interest at a rate of LIBOR plus 1.00% per annum until paid. To the extent that we are unable to make payments under the Tax Receivable Agreement for any other reason, such payments will generally accrue interest at a rate of LIBOR plus 5.00% per annum until paid.

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements. However, we believe the accounting policies described below are particularly important to the portrayal and understanding of our financial position and results of operations and require application of significant judgment by our management. In applying these policies, management uses its judgment in making certain assumptions and estimates.

These judgments involve estimations of the effect of matters that are inherently uncertain and may have a significant impact on our quarterly and annual results of operations or financial condition. Changes in estimates and judgments could significantly affect our result of operations, financial condition, and cash flow in future years. The following is a description of what we consider to be our most critical accounting policies.

Impairment of goodwill and other indefinite-lived intangible assets

Goodwill and intangible assets considered to have an indefinite life (primarily our trade names) are evaluated throughout the year to determine if indicators of impairment exist. Such indicators include, but are not limited to, events or circumstances such as a significant adverse change in our business, in the business overall climate, unanticipated competition, a loss of key personnel, adverse legal or regulatory developments, or a significant decline in the market price of our common stock.

If no indicators of impairment have been noted during these preliminary assessments, we perform an assessment of goodwill and intangible assets annually as of the first day of our fourth fiscal quarter. We first assess qualitatively whether it is more-likely-than-not that an impairment does not exist. Significant factors considered in this assessment include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, overall financial performance, and results of past impairment tests. If we do not qualitatively determine that it is more-likely-than-not that an impairment does not exist, we perform a quantitative impairment test.

In performing a quantitative test for impairment of goodwill, we primarily use the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of goodwill and indefinite-lived intangible assets. Significant assumptions made by management in estimating fair value under the discounted cash flow model include future trends in sales and terminal growth rates, operating expenses, overhead expenses, tax depreciation, capital expenditures, and changes in working capital, along with an appropriate discount rate based on our estimated cost of equity capital and after-tax cost of debt. Significant assumptions used to determine

54

fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.

In the process of a quantitative test of our trade name intangible assets, we primarily use the relief of royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief of royalty method include future trends in sales, a royalty rate, and a discount rate to be applied to the forecast revenue stream.

There is an inherent degree of uncertainty in preparing any forecast of future results. Future trends in system-wide sales are dependent to a significant extent on national, regional, and local economic conditions. Any decreases in customer traffic or average repair order due to these or other reasons could reduce gross sales at franchise locations, resulting in lower royalty and other payments from franchisees, as well as lower sales at company-operated locations. This could reduce the profitability of franchise locations, potentially impacting the ability of franchisees to make royalty payments owed to us when due, which could adversely impact our current cash flow from franchise operations), and company-operated sites.

Business combinations

We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets, including trade names, franchise agreements, license agreements, customer relationships, real property and market adjustments for in-place lease agreements. The Company will record a right-of-use (“ROU”) asset for acquired leases at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease. As a result, in the case of significant acquisitions, we normally obtain the assistance of a third-party valuation specialist in estimating the value of real property and intangible assets. The fair value measurements are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. Favorable or unfavorable market terms used to value the ROU assets are estimated based on comparable market data. Fair values of acquired trade names are estimated using an income approach, specifically the relief-from-royalty method. Assumptions utilized in the determination of fair value include forecasted sales, discount rates, and royalty rates. While we believe the expectations and assumptions about the future are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances, like the COVID-19 pandemic, may occur, which could affect the accuracy or validity of the estimates and assumptions.

Long-lived assets

On a regular basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets (primarily real property and equipment) may not be recoverable. We test impairment using historical cash flows and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. Significant factors considered include, but are not limited to, current and forecast sales, current and forecast cash flows, the number of years the site has been in operation, remaining lease life (if applicable), and other factors which apply on a case-by-case basis. The analysis is performed at the individual site level for indicators of permanent impairment. Recoverability of the Company's assets is measured by comparing the assets' carrying value to the undiscounted cash flows expected to be generated over the assets' remaining useful life or remaining lease term, whichever is less. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets.

On a regular basis, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of intangible assets with finite lives, primarily assets related to franchise and license agreements, may not be recoverable. Recoverability of the asset is measured by comparing the assets' carrying value to the undiscounted future cash flows expected to be generated over the asset's remaining useful life. Significant factors considered include, but are not limited to, current and forecast sales, current and forecast cash flows, and a discount rate to be applied to the forecast revenue stream.

Income taxes

We estimate certain components of our provision for income taxes. Our estimates and judgments include, among other items, the calculations used to determine the deferred tax asset and liability balances, effective tax rates for state and local income taxes, uncertain tax positions, amounts deductible for tax purposes, and related reserves. We adjust our annual effective

55

income tax rate as additional information on outcomes or events becomes available. Further, our assessment of uncertain tax positions requires judgments relating to the amounts, timing, and likelihood of resolution.

We account for income taxes under the liability method whereby deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which the assets and liabilities are expected to be recovered or settled. The effects on deferred tax assets and liabilities of subsequent changes in the tax laws and rates are recognized in income during the year the changes are enacted.

In assessing the realizability of deferred tax assets, we consider whether it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

We follow the applicable authoritative guidance with respect to the accounting for uncertainty in income taxes recognized in our consolidated financial statements. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. We record any interest and penalties associated as additional income tax expense in the consolidated statements of operations.

Leases

The Company is the lessee in a significant real estate portfolio, primarily through ground leases (the Company leases the land and generally owns the building) and through leases of land and buildings. The Company records a right of use (“ROU”) asset and lease liability based on the present value of the Company’s estimated future minimum lease payments over the lease term.

In determining the initial lease term, the Company generally does not include periods covered by renewal options, as the Company does not believe these renewal options are reasonably assured of being exercised. These judgments may produce materially different amounts of depreciation, amortization, and rent expense than would be reported if different assumed lease terms were used.

If a lease does not provide enough information to determine the implicit interest rate in the agreements, the Company uses its incremental borrowing rate in calculating the lease liability. The Company determines its incremental borrowing rate for each lease by reference to yield rates on collateralized debt issuances, which approximates borrowings on a collateralized basis, by companies of a similar credit rating as the Company, with adjustments for differences in years to maturity and implied company-specific credit spreads.

Equity-based Compensation

On April 17, 2015, Driven Investor LLC (“Parent”) entered into a limited liability company agreement (the “Equity Plan”). The Equity Plan, among other things, established the ownership of certain membership units in the Parent and defined the distribution rights and allocations of profits and losses associated with those membership units. On January 6, 2021, the Company’s board of directors approved the 2021 Omnibus Incentive Plan (the “Plan”) and effective January 14, 2021, the Company’s shareholders adopted and approved the Plan. The Plan provides for the granting of stock options, stock appreciation rights, restricted stock awards, restricted stock units, other stock-based awards, other cash-based awards, or any combination of the foregoing to current and prospective employees and directors of, and consultants and advisors to, the Company and its affiliates.

We recognize expense related to the fair value of equity-based compensation over the service period (generally the vesting period) in the consolidated financial statements based on the estimated fair value of the award on the grant date.

The grant date fair value of all incentive units is estimated using the Black-Scholes option pricing model. The pricing model requires assumptions, which include the expected life of the profits interests, the risk-free interest rate, the expected dividend yield, and expected volatility of our units over the expected life, which significantly impacts the assumed fair value. We account for forfeitures as they occur.

The expected term of the incentive units is based on evaluations of historical and expected future employee behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on the historical volatility of several public entities that are similar to the Company, as the Company does not have sufficient historical transactions of its own units on which to base expected volatility.

56

We engage third-party valuation experts to assist in the valuation of our incentive units. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.

The assumptions underlying our valuations represent management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation expense could be materially different. Following the closing of the initial public offering, the fair value of our common stock was determined based on the quoted market price of our common stock.

Application of New Accounting Standards

See Note 2 of the consolidated financial statements for a discussion of recently issued accounting standards.