Driven Brands Holdings Inc. (DRVN) FY 2023 MD&A

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. We operate on a 52 or 53-week fiscal year, which ends on the last Saturday in December. The twelve months ended December 30, 2023 and December 31, 2022 were 52 and 53 week periods, respectively.

Comparative results for the years ending December 31, 2022 and December 25, 2021 are included in “Item 7- Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our previously filed 2022 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 approximately 5,000 locations across 49 U.S. states and 13 other countries. Our scaled, diversified platform fulfills an extensive range of core retail and commercial automotive needs, including paint, collision, glass, and repair services, as well as a variety of high-frequency services, such as oil changes and car washes. We have continued to grow our base of consistent recurring revenue by adding new franchised and company-operated stores and same store sales growth. Driven Brands generated net revenue of approximately $2.3 billion during the year ended December 30, 2023, an increase of 13% compared to the prior year, and system wide sales of approximately $6.3 billion during the year ended December 30, 2023, an increase of 12% from the prior year.

During the third quarter of 2023, management initiated a strategic review of the U.S. car wash operations, which included, but was not limited to, an evaluation of the following: store performance, the competitive landscape, revenue and expense optimization opportunities, and capital requirements. As a result of this review, management approved the closure of 29 stores, halted the opening of new company-operated stores, and began marketing property and equipment for sale that will not be utilized by the Company. These actions resulted in impairment charges of $122 million relating to U.S. Car Wash property and equipment and right-of-use assets during the year ended December 30, 2023. As of December 30, 2023, the Company has reclassified $301 million of assets from property and equipment to assets held for sale on the consolidated balance sheet.

As a result of the evaluation performed above, as well as other qualitative and quantitative factors, including a decline in the stock price during 2023, management determined a triggering event had occurred requiring an interim step one quantitative analysis of the Company’s goodwill and indefinite lived intangible assets during the third quarter of 2023. Based on the results of our interim impairment analysis, we concluded the carrying value of the U.S. Car Wash reporting unit exceeded its fair value, and we recorded a full goodwill impairment charge of $851 million during the third quarter of 2023. The Company performed its annual impairment analysis as of the first day of the fourth quarter and no additional impairments were recorded.

During the fourth quarter of 2023, management evaluated price/mix metrics for U.S. car wash locations and adjusted product offerings to improve retail customer revenue as well as executed cost saving measures to ensure detergent, water usage, and labor optimization. In addition, as part of management’s review of the U.S. glass business integration, management performed a store footprint analysis, which included redundant locations within a market, and closed 22 U.S. glass stores, reduced labor headcount, and implemented technology to improve customer experience and conversion. Costs associated with store closures were not material due to the asset-light nature of this business.

2023 Highlights and Key Performance Indicators

(as compared to same period in the prior year, unless otherwise noted)

•Net revenue increased 13% to $2.3 billion, driven by same store sales and net store growth.

•Consolidated same store sales increased 7%.

•Net new stores were 183 for 2023.

•Net Loss of $745 million or $4.53 loss per diluted share in the current year compared to Net Income of $43 million or $0.25 earnings per diluted share in the prior year period, primarily relating to impairment charges and related tax benefits recorded in the current period.

•Adjusted Net Income (non-GAAP) decreased 28% to $142 million or $0.85 per diluted share. The decrease was primarily due to decreased Segment Adjusted EBITDA within our Car Wash segment as well as increased interest and depreciation

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expense, partially offset by increased Segment Adjusted EBITDA within our Maintenance, Paint, Collision & Glass, and Platform Services segments.

•Adjusted EBITDA (non-GAAP) increased 4% to $517 million. The increase was primarily due to increased Segment Adjusted EBITDA within our Maintenance, Paint, Collision & Glass, and Platform Services segments, partially offset by decreased Segment Adjusted EBITDA within our Car Wash segment.

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, which may be different from how others define similar terms. 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, equity compensation, loss on debt extinguishment, foreign currency transaction related gains or losses, store opening costs, cloud computing amortization, 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 10 in our consolidated financial statements for a reconciliation of income before taxes to Segment Adjusted EBITDA for the years ended December 30, 2023 and December 31, 2022.

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The following table sets forth our key performance indicators for the year ended December 30, 2023 and December 31, 2022:

(1) Platform Services same store sales metrics were removed as a Key Performance Indicator as sales included within the calculation represented an insignificant portion of Platform Services total sales.

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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, equity compensation, loss on debt extinguishment, cloud computing amortization, 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 Net (Loss) Income to Adjusted Net Income and Adjusted Earnings per Share:

Adjusted Net Income /Adjusted Earnings per Share

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, equity compensation, loss on debt extinguishment, cloud computing amortization, 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.

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

(a) Consists of acquisition costs as reflected within the consolidated statements 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 non-recurring payroll-related costs. 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 was recorded in the fourth quarter of 2022.

(c) Includes non-cash amortization expenses relating to cloud computing arrangements.

(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 as well as unrealized gains and 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 goodwill impairment charges within the Car Wash segment. Refer to Note 7 in our consolidated financial statements for additional information.

(h)     Certain indefinite-lived Car Wash trade names were impaired as the Company elected to discontinue their use. Refer to Note 7 in our consolidated financial statements for additional information.

(i)     Relates to (gains) losses, net on sale leasebacks, impairment of certain fixed assets and operating lease right-of-use assets related to closed and underperforming locations, assets held for sale, and lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates. Refer to Note 7 in our consolidated financial statements for additional information.

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

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

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(l) Represents valuation allowances on income tax carryforwards in certain domestic and 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 Loss (Income) and Adjusted Net Income, excluding the provision for uncertain tax positions. 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.

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Results of Operations for the Year Ended December 30, 2023 Compared to the Year Ended December 31, 2022

Net Income

We recognized a net loss of $745 million, or $4.53 loss per diluted share for the year ended December 30, 2023, compared to a net income of $43 million, or $0.25 earnings per diluted share for the year ended December 31, 2022. The decrease of $788 million was primarily due to the following:

•a non-cash goodwill impairment charge of $851 million included in the Car Wash segment as well as $133 million of consolidated asset impairment charges, primarily relating to Car Wash assets for the 29 approved store closures, underperforming stores, and assets held for sale in the current period;

•a loss on sale or disposals of fixed assets of approximately $5 million during the year ended December 30, 2023 compared to a gain of $35 million during the year ended December 31, 2022, primarily relating to sale leaseback transactions and a gain on the sale of CARSTAR company-operated stores in the prior year;

•increased interest expense of $50 million, primarily relating to a higher variable interest rate on the Term Loan Facility in the current period, the full-year impact of interest relating to borrowings under the Series 2022-1 Class A-2 Securitization Senior Notes issued in the fourth quarter of 2022, and increased borrowings on the Revolving Credit Facility;

•decreased operating margins within the Car Wash segment; and

•increased depreciation and amortization expenses of $28 million relating to capital expenditures and new store openings during 2023.

These decreases were partially offset by:

•a $125 million non-cash intangible impairment charge related to the change in intended use of certain existing Car Wash trade names migrating to the Take 5 Car Wash brand in the prior period;

•a decrease in tax expense of $128 million;

•reduced losses for foreign exchange of $20 million; and

•increases related to same store sales growth, primarily within the Maintenance segment, organic store count growth, and unit growth from acquisitions during 2023.

Adjusted Net Income

Adjusted net income was $142 million for the year ended December 30, 2023, a decrease of $54 million, compared to $197 million for the year ended December 31, 2022. This decrease was primarily due to the following:

•increased interest expense of $50 million, primarily relating to a higher variable interest rate on the Term Loan Facility in the current period, the full-year impact of interest relating to borrowings under the Series 2022-1 Class A-2 Securitization Senior Notes issued in the fourth quarter of 2022, and increased borrowings on the Revolving Credit Facility;

•decreased operating margins within the Car Wash segment; and

•increased depreciation expenses of $26 million relating to capital expenditures and new store openings during 2023.

The decreases were partially offset by:

•increases related to same store sales growth, primarily within the Maintenance segment, organic store count growth, and unit growth from acquisitions in the trailing twelve month period.

Adjusted EBITDA

Adjusted EBITDA was $517 million for the year ended December 30, 2023, an increase of $18 million, compared to $499 million for the year ended December 31, 2022. The increase in Adjusted EBITDA was primarily due to:

•increases related to same store sales growth, primarily within the Maintenance segment, organic store count growth, and unit growth from acquisitions in the trailing twelve month period.

The increases were partially offset by:

•decreased operating margins within the Car Wash segment.

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To facilitate the 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.

Net Revenue

Franchise Royalties and Fees

Franchise royalties and fees increased $19 million, or 11%, primarily due to same store sales growth and net increase of 104 franchised stores. Franchised system-wide sales increased $474 million, or 12%.

Company-operated Store Sales

Company-operated store sales increased $202 million, or 15%, of which approximately $116 million, $82 million, and $5 million related to the Maintenance, Paint, Collision & Glass, and Car Wash segments, respectively. The sales increase in the Maintenance segment was primarily due to same store sales growth and 59 net new company-operated stores. The sales increase in the Paint, Collision & Glass segment was primarily from new store growth in the current year as well as continued ramp for stores acquired in the prior year, partially offset by a decrease in sales relating to company-operated CARSTAR stores sold in 2022. The sales increase in the Car Wash segment was primarily driven by the addition of new company-operated stores through acquisitions and greenfield openings in the current year and continued ramp for stores acquired or opened in the prior year, which was partially offset by a decrease in same store sales and store closures predominately in the fourth quarter of 2023. In aggregate, the Company added 83 company-operated stores year-over-year.

Independently-Operated Store Sales

Independently-operated store sales (comprised entirely of sales from the international car wash locations) increased $1 million, or 1%, primarily due to an increase in same store sales and a positive impact from foreign exchange.

Advertising Fund Contributions

Advertising fund contributions increased by $11 million, or 13%, primarily due to an increase in franchise system-wide sales of approximately $474 million, or 12%, from same store sales growth and an additional 104 net new franchise stores. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of franchisee gross sales.

Supply and Other Revenue

Supply and other revenue increased $38 million, or 15%, primarily due to growth in product and service revenue within the Maintenance and Platform Services segments as a result of an increase in system-wide sales.

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Operating Expenses

Company-Operated Store Expenses

Company-operated store expenses increased $192 million, or 24%, primarily due to increased operations relating to 83 net company-operated stores added during 2023 as well as increased operating costs primarily relating to increased labor costs and rent expense at properties converted to leases through sale leasebacks in the prior year.

Independently-Operated Store Expenses

Independently-operated store expenses (comprised entirely of expenses from the international car wash locations) increased $1 million, or 1%, primarily due to increased supplies expense.

Advertising Fund Expenses

Advertising fund expenses increased $9 million, or 11%, which is commensurate with the increase to advertising fund contributions during the period. Advertising fund expenses generally trend consistent with advertising fund contributions.

Supply and Other Expenses

Supply and other expenses increased $13 million, or 9%, due to an increase in supply and other revenue.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $60 million, or 16%, primarily due to a loss on sale or disposals of fixed assets of approximately $5 million in the current period compared to a gain of $35 million in the prior year, relating to sale leaseback transactions as well as a gain on the sale of CARSTAR company-operated stores in the prior year. In addition, the Company incurred higher marketing expenses and infrastructure costs in the current year. These increases were partially offset by a $15 million charge for change in estimate for the Tax Receivable Agreement in the prior year, as well as reduced employee related benefits and professional fees in the current year.

Acquisition Related Costs

Acquisition related costs decreased $2 million, or 14%, due to decreased acquisition activity in the current year compared to the prior year.

Store Opening Costs

Store opening costs increased by $3 million, or 103%, primarily due to costs associated with converting stores from U.S. glass acquisitions to the AGN brand and costs associated with opening new Take 5 Oil, U.S. glass, and U.S. car wash company-operated stores.

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Depreciation and Amortization

Depreciation and amortization expense increased $28 million, or 19%, due to additional fixed assets and finite-lived intangible assets recognized in conjunction with recent acquisitions and higher capital expenditures, primarily related to oil change and car wash site development, as well as full year depreciation and amortization for stores opened and intangibles acquired during 2022.

Goodwill Impairment

During the year ended December 30, 2023, a goodwill impairment charge of $851 million was recorded directly attributable to our Car Wash segment. For more information, refer to Note 7 in our consolidated financial statements included within this Form 10-K.

Trade Name Impairment Charges

During the year ended December 31, 2022, the Company made the strategic decision to rebrand the majority of its U.S. car wash locations to operate under the name “Take 5 Car Wash”, and therefore discontinuing 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. For more information, refer to Note 7 in our consolidated financial statements included within this Form 10-K.

Asset Impairment Charges and Lease Terminations

Asset impairment charges and lease terminations increased by $127 million. During the year ended December 30, 2023, the Company recorded impairment charges primarily related to property and equipment and right-of-use assets for the 29 stores management approved for closure, underperforming stores, and impairments relating to assets held for sale or abandoned within the Car Wash segment. During the year ended December 31, 2022, the Company recorded impairment charges relating to certain property and equipment and operating lease right-of-use assets at closed locations. For more information, refer to Note 7 in our consolidated financial statements included within this Form 10-K.

Interest Expense, Net

Interest expense, net increased $50 million, or 44%, primarily relating to a higher variable interest rate on the Term Loan Facility in the current period, the full-year impact of interest relating to borrowings under the Series 2022-1 Class A-2 Securitization Senior Notes issued in the fourth quarter of 2022, and increased borrowings on the Revolving Credit Facility.

(Gain) Loss on Foreign Currency Transactions, Net

The gain on foreign currency transactions for the year ended December 30, 2023 was primarily comprised of transaction gains in our foreign operations of $2 million and a gain on foreign currency hedges of $1 million. The loss on foreign currency transactions for the year ended December 31, 2022 was comprised of a $16 million net remeasurement loss on our non U.S. dollar entities, including third party long-term debt and intercompany notes.

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Income Tax (Benefit) Expense

Income tax benefit was $103 million for the year ended December 30, 2023 compared to an income tax expense of $25 million for the year ended December 31, 2022. The effective income tax rate for the year ended December 30, 2023 was 12.1% compared to 36.8% for the year ended December 31, 2022. The net decrease in income tax expense and effective tax rate was primarily driven by impairments recorded during the year ended December 30, 2023.

Segment Results of Operations for the Year Ended December 30, 2023 Compared to the Year Ended December 31, 2022

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, store opening and closure costs, equity compensation, loss on debt extinguishment, cloud computing amortization, and certain non-recurring, non-core, infrequent or unusual charges. Shared services costs are not allocated to these segments and are included in Corporate and Other. Segment Adjusted EBITDA may not be comparable to similarly titled metrics of other companies due to differences in methods of calculation.

Maintenance

Maintenance net revenue increased $161 million, or 20%, driven primarily by a $116 million increase in company-operated store sales from same store sales growth and 59 net new company-operated stores. Supply and other revenue increased by $33 million, or 53%, primarily due to higher system-wide sales from franchised stores. Franchise royalties and fees increased by $11 million, or 25%, primarily due to the $167 million, or 18%, increase in franchised system-wide sales from same store sales growth and 82 net new franchise stores.

Maintenance Segment Adjusted EBITDA increased $71 million, or 27%, primarily due to revenue growth, cost management, and operational leverage utilizing our efficient labor model at company-operated locations.

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Car Wash

Car Wash segment net revenue increased $5 million, or 1%, driven primarily by a $5 million increase in company-operated store sales from the addition of 32 new company-operated stores in the current year and continued ramp for stores acquired or opened in the prior year, which was partially offset by a decrease in same store sales and store closures predominately in the fourth quarter of 2023. Independently-operated store sales increased $1 million due to an increase in same store sales for independently-operated stores and positive impacts from foreign exchange. Supply and other revenue decreased $1 million due to decreased vending sales.

Car Wash is comprised of car wash sites throughout the U.S., Europe, and Australia with varying geographical, economical, and political factors, which could impact the results of the business. Our U.S. Car Wash locations have experienced softening demand, increased competitive pressures, and negative weather patterns, which have contributed to negative same store sales, as well as political disruptions in our international locations resulting in increased costs and reduced operational results. We perform site reviews to evaluate operational efficiencies and these reviews could result in future impairment charges.

During the year ended December 30, 2023, management initiated a strategic review of the U.S. car wash operations, which included, but was not limited to, an evaluation of the following: store performance, the competitive landscape, revenue and expense optimization opportunities, and capital requirements. As a result of this review, management approved the closure of 29 stores, halted the opening of new company-operated stores, and began marketing property and equipment for sale that will not be utilized by the Company.

Car Wash Segment Adjusted EBITDA decreased by $46 million, or 26%, primarily driven by increased rent as a result of sale-leaseback transactions, decreased same store sales within company-operated store sales, and increased company-operated store costs primarily relating to employee compensation, property taxes, insurance, supplies and utilities.

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Paint, Collision & Glass

Paint, Collision & Glass net revenue increased $90 million, or 22%, for the year ended December 30, 2023, as compared to the year ended December 31, 2022. Company-operated store sales increased $82 million, or 35%, primarily from net store growth in the trailing twelve months as well as continued ramp for stores acquired in the prior year, partially offset by a decrease in sales relating to company-operated CARSTAR stores sold in 2022. Franchise royalties and fees revenue increased $11 million, or 11%, primarily due to a $349 million, or 13%, increase in franchised system-wide sales from same store sales growth. Supply and other revenue decreased $2 million, or 3%, due to reduced incentive payments in the current period.

We entered the U.S. glass market in the first quarter of 2022 through the acquisition of Auto Glass Now and have quickly become the second largest player in the U.S. auto glass servicing category. Since entering the U.S. market, we have completed 12 acquisitions and as of December 30, 2023 we have 231 company-operated glass stores. We have continued to integrate these acquisitions, standardize operations, and rebrand to the Auto Glass Now brand name throughout 2023. Due to the size and complexity of these acquisitions, the integrations have taken longer than planned resulting in lower revenue and less cost efficiencies than expected in the current period. During the fourth quarter of 2023, management performed a store footprint analysis, which included redundant locations within a market, and closed 22 U.S. glass stores, reduced labor headcount accordingly, and implemented technology to improve customer experience and conversion. Costs associated with store closures were not material due to the asset-light nature of this business. We perform site reviews to evaluate operational efficiencies and these reviews could result in future impairment charges.

Paint, Collision & Glass Segment Adjusted EBITDA increased $6 million, or 4%, primarily due to revenue growth from acquisitions, including full year operations of prior year acquisitions, same store sales growth, and a one-time franchise licensee termination fee of $5 million, partially offset by higher employee-related costs and reduced volume associated with company-operated stores.

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Platform Services

Platform Services net revenue increased $20 million, or 10%, driven primarily by an increase in total system-wide sales of $6.3 billion in the current year compared to $5.6 billion in the prior year, which resulted in increased product purchases from franchisees and company-operated stores.

Platform Services Segment Adjusted EBITDA increased $8 million, or 11%, primarily driven by a combination of revenue growth and cost management.

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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, and Driven Brands Canada Funding Corporation (along with the Issuer, the “Co-Issuers”) are subject to certain quantitative covenants related to debt service coverage and leverage ratios in connection with our securitization senior notes. Our Term Loan Facility and Revolving Credit Facility also have certain qualitative covenants. As of December 30, 2023, the Co-Issuers and Driven Holdings were in material compliance with all such covenants under their respective credit agreements.

At December 30, 2023, the Company had total liquidity of $319 million, which included $177 million in cash and cash equivalents and $91 million and $52 million of undrawn capacity on its 2019 VFN and Revolving Credit Facility, respectively. This does not include the additional $135 million Series 2022-1 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.

Contractual Obligations

In addition to our liquidity and capital resources, we have significant contractual obligations and commitments as of December 30, 2023 relating to the following:

•Long-term debt and interest obligations - As of December 30, 2023 our outstanding debt balance was $3.0 billion. See Note 9 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 30, 2023, taking into account scheduled maturities and amortization payments. As of December 30, 2023, we estimate interest payments of $149 million due in 2024 and $369 million due in 2025 and thereafter.

•Operating lease commitments - The company and its subsidiaries have operating lease agreements for the rental of office space, company-operated stores, and office equipment. As of December 30, 2023, our remaining contractual commitments for operating leases were $2.2 billion. See Note 11 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 30, 2023, our remaining contractual commitments for sublease rentals were $41 million. See Note 11 to our consolidated financial statements regarding the timing of expected future payments.

The following table illustrates the main components of our cash flows for the year ended December 30, 2023 and December 31, 2022:

Operating Activities

Net cash provided by operating activities was $235 million for the year ended December 30, 2023 compared to $197 million for the year ended December 31, 2022. The increase was due to a $56 million payment for transaction costs associated with the AGN acquisition during the year ended December 31, 2022, partially offset by decreased earnings in the current period.

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Investing Activities

Net cash used in investing activities was $451 million for the year ended December 30, 2023 compared to $840 million for the year ended December 31, 2022. The decrease was due to a $703 million decrease in net cash paid for acquisitions, partially offset by a $160 million increase in capital expenditures, primarily relating to building new company-operated stores and remodeling and improving existing stores and a $139 million decrease in proceeds from sale-leaseback transactions.

Financing Activities

Net cash provided by financing activities was $171 million for the year ended December 30, 2023 primarily related to net borrowings on the revolving credit facility of $248 million and proceeds from the exercise of stock options of $6 million, partially offset by share repurchases of $50 million and repayments of long-term debt, including finance leases, of $33 million. Net cash provided by financing activities was $343 million for the year ended December 31, 2022 primarily related to net debt proceeds and debt related activity. See Note 7 to our consolidated financial statements for additional information regarding the Company’s debt.

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 shareholders. 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 a Tax Receivable Agreement which provides our Pre-IPO shareholders 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 recorded a current tax receivable liability of $56 million and $53 million as of December 30, 2023 and December 31, 2022, respectively, and a non-current tax receivable liability of $118 million as of December 30, 2023 and December 31, 2022, respectively, on the consolidated balance sheets. We made an initial payment of approximately $25 million under the Tax Receivable Agreement in January 2024.

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. As of July 1, 2023, interest accrues at the Base Rate plus an applicable margin or Secured Overnight Financing Rate (“SOFR”) plus an applicable term adjustment plus 1.0%. 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 SOFR plus an applicable term adjustment plus 5.0% per annum until paid.

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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 overall business 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 indefinite-lived 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 used by management in estimating fair value under the discounted cash flow model include revenue growth rates, terminal growth rates, discount rates, and EBITDA margins. Other assumptions include operating expenses, overhead expenses, tax depreciation, and capital expenditures. Assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.

The Company performed an interim quantitative assessment of goodwill as of September 30, 2023 based on factors outlined in Note 7 of the consolidated financial statements within this Form 10-K, which resulted in a full impairment charge to the U.S. Car Wash reporting unit. As of the date of our interim assessment, our International Car Wash and Maintenance-Repair, primarily comprised of the Meineke brand, reporting units have goodwill carrying values approximating $200 million and $111 million, respectively, and the fair value exceeded this amount by approximately 6% and 6%, respectively. The most sensitive assumptions utilized to estimate the fair value of these reporting units were the discount rate and revenue growth rate. A hypothetical 1% increase to the discount rate would have resulted in an impairment of $19 million and $11 million, respectively, for the Car Wash International and Maintenance-Repair reporting units, respectively. A hypothetical 1% decrease to the revenue growth rate would have resulted in an impairment of $4 million and $3 million, respectively, for the Car Wash International and Maintenance-Repair reporting units, respectively. Material changes in these estimates could occur and result in additional impairment charges in future periods.

In the process of performing 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.

The Company performed an interim quantitative assessment of indefinite-lived trade names as of September 30, 2023 based on factors outlined in Note 7 of the consolidated financial statements within this Form 10-K, which did not result in an impairment charge. As of the date of our interim assessment, the fair value of indefinite-lived trade names within our Maintenance, Paint, Collision & Glass, and Platform Services segments, with carrying values of $137 million, $27 million, and $9 million, respectively, did not significantly exceed their respective carrying values. The most sensitive assumption for these

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tradenames is the related royalty rate and discount rate. A hypothetical 0.5% decrease to the royalty rate would have resulted in an impairment of $37 million, $2 million, and $2 million for the Maintenance, Paint, Collision & Glass, and Platform Services segments, respectively. A hypothetical 1% increase to the discount rate would have resulted in an impairment of $12 million, $3 million, and $1 million for the Maintenance, Paint, Collision & Glass, and Platform Services segments, respectively. Material changes in these estimates could occur and result in additional impairment charges in future periods.

On October 1, 2023, the first day of the fourth quarter, the Company performed its annual impairment assessment, which did not result in additional impairments.

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 a 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 may not be recoverable. We test impairment at the individual store asset group level, which includes property and equipment and operating lease assets. 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 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.

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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

We have an equity-based compensation plan that provides compensation to employees through various grants 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.

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.

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Application of New Accounting Standards

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