Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

v3.22.4
Fair Value Measurements
12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements

17. Fair Value Measurements

Accounting standards establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair values as follows:

Level 1: Observable inputs such as quoted prices for identical assets in active markets;

Level 2: Inputs other than quoted prices for identical assets in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data which requires the use of valuation techniques and the development of assumptions.

The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level of input that is significant to the fair value measure in its entirety.

The carrying amount of financial assets and liabilities reported in the Consolidated Balance Sheets for cash and cash equivalents, commissions and fees receivable—net, other current assets, accounts payable, and other accrued liabilities at December 31, 2022 and 2021, approximate fair value because of the short-term duration of these instruments.

Derivative Instruments

Redeemable Preferred Units

In prior periods, the fair value of the combined embedded derivative of the make-whole provision on the Redeemable Preferred Units (“RPU”) was based on the likelihood of a mandatorily redeemable triggering event, a Realization Event as defined by the Onex Purchase Agreement, and the present value of any remaining unpaid dividends between the reporting period and the fifth anniversary of the issuance date, which was a Level 3 fair value measurement. In determining the fair value, the Company historically estimated the likelihood of a Realization Event based on discussions with management, then estimated the present value of any remaining dividends using a 10.5% discount rate derived from a review of comparable issuances and benchmarking. The present value of the remaining dividends was then combined with the estimated likelihood of a Realization Event to arrive at the estimated fair value. As the Company's IPO in July 2021 was a Realization Event triggering the payment to Onex of the make-whole provision, there are no further amounts outstanding.

Interest Rate Cap

The Company uses an interest rate cap to manage its exposure to interest rate fluctuations related to the Company's Term Loan. The fair value of the interest rate cap is determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the cap. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The inputs used in determining the fair value of the interest rate cap are considered Level 2 inputs.

Contingent Consideration

The fair value of contingent consideration obligations is based on the present value of the future expected payments to be made to the sellers of certain acquired businesses in accordance with the provisions outlined in the respective purchase agreements, which is a Level 3 fair value measurement. In determining fair value, the Company estimates cash payments based on management’s financial projections of the performance of each acquired business relative to the formula specified by each purchase agreement. The Company utilizes Monte Carlo simulations to evaluate financial projections of each acquired business. The Monte Carlo models consider forecasted revenue and EBITDA and market risk adjusted revenue and EBITDA, which are run through a series of simulations. As of December 31, 2022, the models used risk-free rates and expected volatility of 4.57% and 22.50%, respectively, and used a credit spread of 4.50%. As of December 31, 2021, the risk-free rates, expected volatility, and credit spread used in the models ranged from 0.06% to 0.85%, 15.0% to 35.0%, and 2.30% to 3.20%, respectively. The Company then discounts the expected payments created by the Monte Carlo model to present value using a risk-adjusted rate that takes into consideration the market-based rates of return that reflect the ability of the acquired entity to achieve its targets. The discount rate used for the year ended December 31, 2022 was 16.1%. The discount rates used for the year ended December 31, 2021 ranged from 5.2% to 12.8%.

Each period, the Company revalues the contingent consideration obligations associated with certain prior acquisitions to their fair value and records subsequent changes to the fair value of these estimated obligations in Change in contingent consideration in the Consolidated Statements of Income. Changes in contingent consideration result from changes in the assumptions regarding probabilities of successful achievement of related EBITDA and percentage milestones, the estimated timing in which milestones are achieved, and the discount rate used to estimate the fair value of the liability. Contingent consideration may change significantly as the Company’s revenue growth rate and EBITDA estimates evolve and additional data is obtained, impacting the Company’s assumptions. The use of different assumptions and judgements could result in a materially different estimate of fair value which may have a material impact on the results from operations and financial position. See Note 4, Mergers and Acquisitions for further information on contingent consideration.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis by fair value hierarchy input level:

 

As of December 31, 2022

 

As of December 31, 2021

 

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap

$

 

$

45,860

 

$

 

$

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt (1)

 

1,955,879

 

 

 

 

 

 

1,631,412

 

 

 

 

 

Contingent purchase consideration

 

 

 

 

 

29,251

 

 

 

 

 

 

42,053

 

Total assets and liabilities
measured at fair value

$

1,955,879

 

$

45,860

 

$

29,251

 

$

1,631,412

 

$

 

$

42,053

 

(1)
As of December 31, 2022, this represents the Term Loan and Senior Secured Notes. As of December 31, 2021, only the Term Loan was outstanding. See Note 10, Debt.

The following is a reconciliation of the beginning and ending balances for the Level 3 liabilities measured at fair value:

 

 

Year Ended December 31,

 

 

 

2022

 

 

2021

 

 

 

Contingent Purchase Consideration

 

 

Make-Whole Provision on RPU

 

 

Contingent Purchase Consideration

 

 

Total

 

Balance at beginning of period

 

$

42,053

 

 

$

30,423

 

 

$

22,096

 

 

$

52,519

 

Newly established liability due to acquisition

 

 

 

 

 

 

 

 

22,011

 

 

 

22,011

 

Total losses included in earnings

 

 

2,433

 

 

 

36,914

 

 

 

3,639

 

 

 

40,553

 

Settlements

 

 

(15,235

)

 

 

(67,337

)

 

 

(5,693

)

 

 

(73,030

)

Balance at end of period

 

$

29,251

 

 

$

 

 

$

42,053

 

 

$

42,053

 

 

 

Of the total $15.2 million settlement of contingent consideration in the year ended December 31, 2022, $6.2 million is presented in the financing section and $9.0 million is presented in the operating section of the Consolidated Statements of Cash Flows. Of the total $5.7 million settlement of contingent consideration in the year ended December 31, 2021, $4.5 million is presented in the financing section and $1.2 million is presented in the operating section of the Consolidated Statements of Cash Flows. The losses included in earnings for the make-whole provision on RPU were recognized in Other non-operating income (loss) in the Consolidated Statements of Income.