ACQUISITIONS

Franchisee Acquisitions

During July 2018, the Company acquired 90 Aaron's-branded franchised stores operated by three franchisees for an aggregated purchase price of $127.1 million in cash. The acquisitions are expected to benefit the Company's omnichannel platform through added scale, strengthening its presence in certain geographic markets, and enhancing operational control, including compliance, to execute its business transformation initiatives.

The acquired operations generated revenues of $22.5 million and pre-tax losses of $0.2 million during the three months ended September 30, 2018 which are included in our condensed consolidated statements of earnings. The results of the acquired operations were negatively impacted by acquisition-related transaction and transition costs and amortization expense of the various intangible assets recorded from the acquisition. The revenues and losses before income taxes above have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated as revenue to the Company from the franchisees during the three months ended September 30, 2018 had the transaction not been completed.

Preliminary Acquisition Accounting

The franchisee acquisitions have been accounted for as business combinations, and the results of operations of the acquired businesses are included in the Company’s results of operations from the respective dates of acquisition. The following table presents a summary of the preliminary fair value of the assets acquired and liabilities assumed in the franchisee acquisitions as of the respective acquisition dates:



(In Thousands)	Amounts Recognized as of Acquisition Dates (preliminary)
Purchase Price	$	127,498
Working Capital Adjustment	(445		)
Consideration Transferred	127,053
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents	43
Lease Merchandise	35,281
Property, Plant and Equipment	4,570
Other Intangibles¹	14,283
Prepaid Expenses and Other Assets	571
Total Identifiable Assets Acquired	54,748
Accounts Payable and Accrued Expenses	(562		)
Customer Deposits and Advance Payments	(2,958		)
Total Liabilities Assumed	(3,520		)
Goodwill²	75,825
Net Assets Acquired	$	51,228

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

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

The preliminary acquisition accounting presented above is subject to refinement. The Company is still assessing the valuation of assumed favorable and unfavorable real estate operating leases based on comparable market terms of similar leases at the acquisition dates, finalizing inputs and assumptions used to value intangible assets acquired, and finalizing certain working capital items. The Company expects these items to be finalized prior to the one year anniversary date of the acquisitions.

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



	Fair Value (in thousands)		Weighted Average Life (in years)
Non-compete Agreements	$	615	3.0
Customer Lease Contracts	4,687		1.0
Customer Relationships	6,195		3.0
Reacquired Franchise Rights	2,786		4.3
Total Acquired Intangible Assets¹	$	14,283

¹Acquired definite-lived intangible assets have a total weighted average life of 2.6 years.

The Company incurred $0.5 million of acquisition-related costs in connection with the franchisee acquisitions during the three months ended September 30, 2018. These costs were included in operating expenses in the condensed consolidated statements of earnings.

2017 Franchisee Acquisition

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

The acquired operations generated revenues of $58.3 million and earnings before income taxes of $2.5 million from July 27, 2017 through December 31, 2017. During the three and nine months ended September 30, 2018, the acquired operations generated revenues of $31.1 million and $98.9 million, respectively, and earnings before income taxes of $1.5 million and $9.5 million, respectively, which are included in our condensed consolidated statements of earnings. Included in the earnings before income taxes of the acquired operations are acquisition-related transaction and transition costs, amortization expense of the various intangible assets recorded from the acquisition and restructuring expenses associated with the closure of several acquired stores. The revenues and earnings before income taxes have not been adjusted for estimated non-retail sales and franchise royalties and fees and related expenses that the Company could have generated as revenue to the Company from SEI, as a franchisee, from July 27, 2017 through September 30, 2018 had the transaction not been completed.

Acquisition Accounting

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



(In Thousands)	Final Amounts Recognized as of Acquisition Date
Purchase Price	$	140,000
Settlement of Pre-existing Accounts Receivable SEI owed Aaron's, Inc.	3,452
Reimbursement for Insurance Costs	(100		)
Working Capital Adjustment	188
Consideration Transferred	143,540
Estimated Fair Value of Identifiable Assets Acquired and Liabilities Assumed
Cash and Cash Equivalents	34
Receivables	1,345
Lease Merchandise	40,941
Property, Plant and Equipment	8,832
Other Intangibles¹	13,779
Prepaid Expenses and Other Assets	440
Total Identifiable Assets Acquired	65,371
Accounts Payable and Accrued Expenses	(6,698		)
Customer Deposits and Advance Payments	(2,500		)
Capital Leases	(4,514		)
Total Liabilities Assumed	(13,712		)
Goodwill²	91,881
Net Assets Acquired	$	51,659

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

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

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



	Fair Value (in thousands)		Weighted Average Life (in years)
Non-compete Agreements	$	1,244	5.0
Customer Lease Contracts	2,154		1.0
Customer Relationships	3,215		2.0
Reacquired Franchise Rights	3,640		4.1
Favorable Operating Leases	3,526		11.3
Total Acquired Intangible Assets¹	$	13,779

¹Acquired definite-lived intangible assets have a total weighted average life of 5.1 years.

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

Other Acquisitions

In addition to the acquisitions discussed above, the Company acquired the store operations of five franchisees during the nine months ended September 30, 2018 and three franchisees during the year ended December 31, 2017.

Net cash outflows related to the acquisitions of other Aaron's franchisees, other rent-to-own store businesses, and customer contracts aggregated to $14.1 million and $2.4 million during the nine months ended September 30, 2018 and 2017, respectively. The effect of these acquisitions on the condensed consolidated financial statements for the nine months ended September 30, 2018 and 2017 was not significant.