Driven Brands Holdings Inc. (DRVN) FY 2024 MD&A

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 28, 2024 and December 30, 2023 were both 52 week periods.

Comparative results for the years ending December 30, 2023 and December 31, 2022 are included in “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our previously filed 2023 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 5,200 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 28, 2024, an increase of 2% compared to the prior year, and system-wide sales of approximately $6.5 billion during the year ended December 28, 2024, an increase of 4% from the prior year.

Although we have continued to experience total Company same store sales growth for 16 consecutive quarters through our diversified customer base and service offerings, we have experienced and expect to continue experiencing softening demand across several of our segments, primarily as a result of inflationary pressures, increased competition, industry dynamics, and negative weather patterns, including hurricanes.

During the fourth quarter of 2024, the Company performed a step one quantitative impairment analysis of the U.S. Car Wash long-lived assets. Based on the results of our impairment analysis, we concluded the carrying value of the U.S. Car Wash long-lived assets exceeded the fair value and an impairment charge of $325 million was recorded.

2024 Highlights and Key Performance Indicators

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

•Net revenue increased 2% to $2.3 billion, driven by company-operated store revenue, primarily due to net new store growth and same store sales growth.

•Consolidated same store sales increased 1.3%.

•Net new stores were 191 for 2024.

•Net Loss decreased $452 million to $292 million or $1.82 loss per diluted share in the current year compared to $745 million or $4.53 loss per diluted share in the prior year period, primarily relating to improved operating margins within our Maintenance, Platform Services and Paint, Collision & Glass segments, net new store growth, same store sales growth, and a goodwill impairment charge lapping in the prior year, partially offset by increased employee related benefit costs, including performance-based and share-based compensation expense, reduced margins within the Car Wash segment, a lower tax benefit, an unfavorable impact from foreign exchange, increased loss on disposal or sale of assets, and increased asset impairment charges in the current period.

•Adjusted Net Income (non-GAAP) increased 31% to $186 million or $1.14 per diluted share. The increase was primarily due to improved operating margins within our Maintenance, Platform Services and Paint, Collision & Glass segments, net new store growth, and same store sales growth, partially offset by increased employee related benefit costs, including performance-based compensation, and reduced margins within the Car Wash segment.

•Adjusted EBITDA (non-GAAP) increased 7% to $553 million. The increase was primarily due to improved operating margins within our Maintenance, Platform Services and Paint, Collision & Glass segments, net new store growth, and same store sales growth, partially offset by increased employee related benefit costs, including performance-based compensation, and reduced margins within the Car Wash segment.

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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, 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.

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, foreign currency transaction related gains or losses, store opening costs, cloud computing amortization, and certain non-recurring and non-core, infrequent or unusual charges. Adjusted EBITDA is a supplemental measure of operating performance of our segments and may not be comparable to similar measures reported by other companies. 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 income (loss) before taxes to Adjusted EBITDA for the years ended December 28, 2024 and December 30, 2023.

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The following table sets forth our key performance indicators for the years ended December 28, 2024 and December 30, 2023:

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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 to Adjusted Net Income and Adjusted Earnings per Share:

Adjusted Net Loss/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 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 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.

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

(d)     Represents non-cash share-based compensation expense.

(e)    Represents foreign currency transaction (gains) losses, net that primarily related to the remeasurement of our intercompany loans as well as gains and losses on cross currency swaps and forward contracts.

(f)     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, lease exit costs and other costs associated with stores that were closed prior to the respective lease termination dates, as well as goodwill impairment within the Car Wash segment. Refer to Note 7 for additional information.

(g)     Represents charges incurred related to the Company’s partial repayment of Senior Secured Notes in conjunction with the sale of its Canadian distribution business.

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

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

(j) Represents valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized.

(k)     Represents the tax impact of adjustments associated with the reconciling items between net income (loss) 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.

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Results of Operations for the Year Ended December 28, 2024 Compared to the Year Ended December 30, 2023

Net Loss

We recognized a net loss of $292 million, or $1.82 loss per diluted share, for the year ended December 28, 2024, compared to a net loss of $745 million, or $4.53 loss per diluted share, for the year ended December 30, 2023. The improvement of approximately $452 million was primarily due to the following:

•positive same store sales within the Maintenance and Paint, Collision & Glass segments;

•net new store openings, primarily within the Maintenance segment;

•operating margin improvements within the Maintenance, Paint, Collision & Glass, and Platform Services segments; and

•a non-cash goodwill impairment charge in the prior year period of $851 million.

These increases were partially offset by:

•increased payroll and employee benefit costs, including performance-based compensation and $33 million of additional share-based compensation expense primarily relating to the modification of pre-IPO awards in the fourth quarter of 2023;

•decreased operating margins within the Car Wash segment;

•decreased tax benefit of $78 million, primarily relating to goodwill impairment charges in the prior year;

•an unfavorable impact from foreign exchange of $23 million compared to the prior year;

•non-cash asset impairment charges of $389 million in the current period, which primarily related to our step one quantitative analysis of long-lived assets as well as assets held for sale and right-of-use assets at closed stores in the current period compared to $133 million in the prior year period, which related to Car Wash fixed assets and right-of-use assets at closed stores and assets held for sale; and

•a net loss of $36 million in the current period primarily comprised of a loss on sale and disposals of fixed assets in our Car Wash business as well as gains on the sale of assets held for sale, compared to a loss on sale or disposals of fixed assets of approximately $5 million during the year ended December 30, 2023.

Adjusted Net Income

Adjusted net income was $186 million for the year ended December 28, 2024 compared to $142 million for the year ended December 30, 2023. This increase of $44 million was primarily due to the following:

•positive same store sales within the Maintenance and Paint, Collision & Glass segments;

•net new store openings, primarily within the Maintenance segment; and

•operating margin improvements within the Maintenance, Paint, Collision & Glass, and Platform Services segments.

The increases were partially offset by:

•increased payroll and employee benefit costs, including performance-based compensation; and

•decreased operating margins within the Car Wash segment.

Adjusted EBITDA

Adjusted EBITDA was $553 million for the year ended December 28, 2024 compared to $517 million for the year ended December 30, 2023. The increase of $36 million was primarily due to:

•positive same store sales within the Maintenance and Paint, Collision & Glass segments;

•net new store openings, primarily within the Maintenance segment; and

•operating margin improvements within the Maintenance, Paint, Collision & Glass, and Platform Services segments.

The increase was partially offset by:

•increased payroll and employee benefit costs, including performance-based compensation; and

•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. Certain percentages presented have been rounded to the nearest number, therefore, totals may not equal the sum of the line items in the tables below.

Net Revenue

Franchise Royalties and Fees

Franchise royalties and fees decreased less than $2 million, or 1%, primarily due to a decrease in average royalty rates within the Paint, Collision & Glass segment and decreased franchise system-wide sales within the Platform Services segment, partially offset by an increase in franchise system-wide sales of $191 million, or 4%, driven by franchise same store sales growth within the Paint, Collision & Glass and Maintenance segments and the addition of 143 net new franchised stores.

Company-Operated Store Sales

Company-operated store sales increased $19 million, or 1%, of which $111 million related to an increase in the Maintenance segment, partially offset by a decrease of $65 million and $27 million related to the Paint, Collision & Glass and Car Wash segments, respectively. The sales increase in the Maintenance segment was primarily due to same store sales growth and 66 net new company-operated stores. The decrease in the Paint, Collision & Glass sales was primarily driven by revenue associated with the sale of nine company-operated stores to a franchisee in the current year. The decrease in Car Wash sales is primarily due to the full year impact in 2024 relating to stores closed during the fourth quarter of 2023 and a decrease in same store sales primarily relating to lower volume. On a net basis, the Company added 45 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 $16 million, or 8%, due to same store sales growth as a result of improved price realization and new product offerings.

Advertising Fund Contributions

Advertising fund contributions increased by $2 million, or 2%, primarily due to an increase in franchise system-wide sales. Our franchise agreements typically require the franchisee to pay continuing advertising fund fees based on a percentage of the franchisee’s gross sales or a stated fee.

Supply and Other Revenue

Supply and other revenue remained flat, primarily due to growth in product and service revenue within the Maintenance segment as a result of an increase in system-wide sales and net store growth, partially offset by the sale of our Canadian distribution business in the current year.

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Operating Expenses

Company-Operated Store Expenses

Company-operated store expenses decreased $11 million, or 1%, primarily due to lower inventory costs and labor efficiency, partially offset by increased rent and property related expenses.

Independently-Operated Store Expenses

Independently-operated store expenses (comprised entirely of expenses from the international car wash locations) increased $12 million, or 11%, primarily due to variable costs associated with the increase in sales.

Advertising Fund Expenses

Advertising fund expenses increased by $4 million, or 4%, 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 decreased $19 million, or 12%, primarily related to the sale of our Canadian distribution business in the current year.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses increased $93 million, or 20%, primarily due to increased payroll and employee benefit costs, including performance-based compensation and $33 million of additional share-based compensation expense primarily relating to the modification of pre-IPO awards in the fourth quarter of 2023, loss on the sale or disposal of assets and businesses of $36 million compared to $5 million in the prior year, and increased cloud computing amortization.

Depreciation and Amortization

Depreciation and amortization expense increased $5 million, or 3%, due to additional fixed assets, primarily related to Take 5 Oil site development.

Goodwill Impairment

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

Asset Impairment Charges and Lease Terminations

Asset impairment charges and lease terminations increased by $256 million for the year ended December 28, 2024 compared to the year ended December 30, 2023. During the year ended December 28, 2024, impairment charges were primarily related to our U.S. Car Wash step one quantitative analysis of long-lived assets as well as assets held for sale and right-of-use assets at closed stores in the current period. During the year ended December 30, 2023, impairment charges were primarily related to U.S. Car Wash fixed assets and right-of-use assets at closed stores and assets held for sale. For more information, refer to Note 7 in our consolidated financial statements included within this Form 10-K.

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Interest Expense, Net

Interest expense, net decreased $7 million, or 4%, primarily due to net debt reduction of $250 million in the current year, primarily relating to the Term loan and Revolving Credit Facility, interest income earned in the current year, and reduced interest related to the Tax Receivable Agreement, partially offset by increased interest and costs associated with the 2024-1 Senior Notes.

Foreign Currency Transactions Loss (Gain), Net

The foreign currency transaction loss for the year ended December 28, 2024 was primarily comprised of transaction remeasurement losses in our foreign operations of $29 million, partially offset by a gain on foreign currency hedges of $9 million. The foreign currency transaction gain for the year ended December 30, 2023 was primarily comprised of transaction remeasurement gains in our foreign operations of $2 million and a gain on foreign currency hedges of $1 million.

Loss on Debt Extinguishment

Represents charges incurred related to the Company’s partial repayment of Senior Secured Notes in conjunction with the sale of its Canadian distribution business.

Income Tax Benefit

Income tax benefit was $25 million for the year ended December 28, 2024 compared to $103 million for the year ended December 30, 2023. The effective tax rate for the year ended December 28, 2024 was 7.9% primarily driven by the recognition of valuation allowances on income tax carryforwards in certain domestic jurisdictions that are not more likely than not to be realized, non-deductible share-based compensation and state taxes related to pre-tax income compared to 12.1% for the year ended December 30, 2023.

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Segment Results of Operations for the Year Ended December 28, 2024 Compared to the Year Ended December 30, 2023

We assess the performance of our segments based on 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 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. 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 $144 million, or 15%, driven primarily by a $111 million increase in company-operated store sales from same store sales growth and 66 net new company-operated stores. Supply and other revenue increased by $28 million, or 30%, primarily due to higher system-wide sales. Franchise royalties and fees increased by $5 million, or 8%, primarily due to a $93 million, or 9%, increase in franchise system-wide sales from same store sales growth and 108 net new franchise stores.

Maintenance Adjusted EBITDA increased $60 million, or 19%, primarily due to net new store growth, same store sales growth, cost management, and operational leverage.

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Car Wash

Car Wash segment net revenue decreased $11 million, or 2%, driven primarily by a $27 million, or 7%, decrease in company-operated store sales due to the full year impact in 2024 relating to stores closed during the fourth quarter of 2023 and a decrease in same store sales primarily relating to lower volume. Independently-operated store sales increased $16 million primarily due to an increase in same store sales as a result of new product offerings and improved price realization.

Car Wash Adjusted EBITDA decreased by $11 million, or 9%, primarily driven by decreased same store sales within company-operated stores, partially offset by positive same store sales within the independently-operated stores and improved inventory cost management.

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Paint, Collision & Glass

Paint, Collision & Glass net revenue decreased $76 million, or 15%, for the year ended December 28, 2024, primarily driven by a decrease in company-operated store sales of $65 million, or 21%, primarily driven by revenue associated with nine company-operated stores that were sold to a franchisee in the current year as well as decreased volume associated with company-operated stores. Franchise royalties and fees decreased $6 million, or 6%, primarily due to a decrease in average royalty rates, partially offset by a $126 million, or 4%, increase in franchise system-wide sales generated by same store sales growth.

Paint, Collision & Glass Adjusted EBITDA decreased $6 million, or 4%, primarily due to Adjusted EBITDA associated with the nine company-operated stores sold to a franchisee in the current year as well as decreased volume associated with company-operated stores, partially offset by an improvement in operating margin.

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Platform Services

Platform Services net revenue decreased $8 million, or 4%, primarily due to the sale of our Canadian distribution business, partially offset by supply sales relating to total company system-wide sales increases in the current year.

Platform Services Adjusted EBITDA increased $3 million, or 4%, primarily driven by 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, has 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 28, 2024, the Co-Issuers and Driven Holdings were in material compliance with all such covenants under their respective credit agreements.

In July 2024, the Company issued $275 million of 2024-1 Senior Notes as well as replaced the 2019 VFN with a $400 million 2024 VFN. Proceeds from the 2024-1 Senior Notes were primarily used to repay the Company’s 2018-1 Senior Notes. See Note 8 to our consolidated financial statements for additional information regarding the Company’s debt.

At December 28, 2024, the Company had total liquidity of $649 million, which included $170 million in cash and cash equivalents and $374 million and $105 million of undrawn capacity on its 2024 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.

On February 24, 2025, the Company entered into a definitive agreement to sell its U.S. Car Wash business to Express Wash Operations, LLC dba Whistle Express Car Wash (the “Buyer”). The aggregate purchase price is $385 million, subject to customary adjustments for cash, indebtedness, working capital, and transaction expenses. Under the terms of the agreement, the Buyer has agreed to pay the Company $255 million in cash and deliver to the Company an interest-bearing seller note in the principal amount of $130 million, subject to customary adjustments. The transition is subject to customary closing conditions.

Contractual Obligations

In addition to our liquidity and capital resources, we have significant contractual obligations and commitments as of December 28, 2024 relating to the following:

•Long-term debt and interest obligations - As of December 28, 2024 our outstanding debt balance was $2.7 billion. 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 28, 2024, taking into account scheduled maturities and amortization payments. As of December 28, 2024, we estimate interest payments of $135 million due in 2025 and $298 million due in 2026 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 28, 2024, our remaining contractual commitments for operating leases were $2.2 billion. 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 28, 2024, our remaining contractual commitments for

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sublease rentals were $40 million. See Note 10 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 28, 2024 and December 30, 2023:

Operating Activities

Net cash provided by operating activities was $241 million for the year ended December 28, 2024 compared to $235 million for the year ended December 30, 2023. The increase was primarily due to net working capital improvements, partially offset by costs associated with improvements to our IT infrastructure during the year ended December 28, 2024.

Investing Activities

Net cash provided by investing activities was $59 million for the year ended December 28, 2024 compared to $451 million used in investing activities for the year ended December 30, 2023. The increase was primarily due to a $308 million decrease in capital expenditures, $299 million proceeds from the sale or disposal of businesses and fixed assets, primarily consisting of $208 million from the sale of assets held for sale, $78 million from the sale of our Canadian distribution business, and $18 million from the sale of nine company-operated collision stores to a franchisee, as well as a $57 million decrease in net cash paid for acquisitions, partially offset by a $143 million decrease in proceeds from sale leaseback transactions.

Financing Activities

Net cash used in financing activities was $303 million for the year ended December 28, 2024 compared to $171 million provided by the year ended December 30, 2023. The decrease in cash provided by financing activities was primarily related to an increase in net repayments of long-term debt, including finance leases, of $436 million, Tax Receivable Agreement payments of $38 million during the year, net repayments on the Revolving Credit facility of $58 million in the current year compared to net borrowings on the Revolving Credit Facility of $248 million in the prior year, debt issuance costs of $10 million in the current year, and proceeds from the exercise of stock options of $6 million in the prior year. The decrease is partially offset by the 2024-1 Senior Notes issuance of $275 million in the current year and share repurchases of $50 million in the prior year. See Note 8 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 or divestitures. The Company recorded a current income tax receivable liability of $23 million and $56 million as of December 28, 2024 and December 30, 2023, respectively, and a non-current income tax receivable liability of $111 million and $118 million as of December 28, 2024 and December 30, 2023, respectively, on the consolidated balance sheets. We made payments of approximately $38 million under the Tax Receivable Agreement in 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.

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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 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.

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 reporting units and indefinite-lived intangible assets. Significant assumptions used by management in estimating fair value under the discounted cash flow model include revenue growth rates, long-term revenue growth rates, discount rates, EBITDA margins, capital expenditures, and tax rates. Other assumptions include operating expenses and overhead expenses. 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 a quantitative assessment of goodwill as of September 29, 2024 for its annual impairment test as the company determined based on qualitative factors it was more-likely-than-not that an impairment existed as of the annual impairment testing date based on historical impairment test results. As of the date of our annual impairment assessment, our Car Wash International reporting unit had a goodwill carrying value approximating $214 million and the fair value exceeded this amount by approximately 3%. The most sensitive assumptions utilized to estimate the fair value of this reporting unit were the discount rate, revenue growth rates, long-term revenue growth rate, EBITDA margins, capital expenditures, tax rate, and the valuation multiples applied. A hypothetical 0.5% increase to the discount rate, 1% decrease to the revenue growth rate, or 1% increase to capital expenditures would have resulted in an impairment of $7 million. A hypothetical 1% decrease to the long-term revenue growth rate or 2% decrease in EBITDA margin would have resulted in an impairment of $22 million. Material changes in these estimates could occur and result in 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

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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 a qualitative assessment of indefinite-lived trade names as of September 29, 2024, which is the date of our annual impairment test, as it was not more-likely-than-not an impairment existed.

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.

The Company performed an interim impairment test over the long-lived assets of the U.S. Car Wash business as of December 28, 2024 and determined the carrying value of the assets exceeded the fair value. An impairment of $325 million was recorded to property and equipment. Refer to Note 7 within the consolidated financial statements within this Form 10-K for additional information.

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 become 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

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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

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.