Fair Value Measurement
 12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurement
Fair Value Measurement

The Company applies ASC Topic 820, Fair Value Measurements and Disclosures, for its financial assets and financial liabilities. The guidance requires disclosures about assets and liabilities measured at fair value. The Company's financial liabilities primarily relate to contingent earn-out payments due to sellers in connection with various acquisitions. The fair value of the due to seller liabilities at December 31, 2017 was $2.1 million. The potential earnout payments and performance are defined in the individual purchase agreement for each acquisition. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the performance target defined and measured to determine the earnout payment due, if any, after each defined measurement period.

The Company's financial assets related to contingent payments that were due from the seller of Command based upon certain employee retention criteria. As of December 31, 2017, there was no remaining balance of the due from seller asset as the employee retention criteria were met.

ASC Topic 820 includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

•
Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.
•
Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.
•
Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

The significant inputs used to derive the fair value of the amounts due to seller include financial forecasts of future operating results, the probability of reaching the forecast and an appropriate discount rate for each contingent liability. Probabilities are estimated by reviewing financial forecasts and assessing the likelihood of reaching the required performance measures based on factors specific to each acquisition as well as the Company’s historical experience with similar arrangements. If an acquisition reaches the required performance measure, the estimated probability would be increased to 100% and would still be classified as a contingent liability on the balance sheet. If the measure is not reached, the probability would be reduced to reflect the amount earned, if any, depending on the terms of the agreement. Discount rates used in determining the fair value of the contingent consideration due to seller ranged between 5% and 6%. Historical results of the respective acquisitions serve as the basis for preparing the financial forecasts used in the valuation.

Quantitative factors are also considered in these forecasts, including acquisition synergies, growth and sales potential and potential operational efficiencies gained. Changes to the significant inputs used in determining the fair value of the contingent consideration due to seller could result in a change in the fair value of the contingent consideration. However, the correlation and inverse relationship between higher projected financial results to the discount rate applied and probability of meeting the financial targets mitigates the effect of any changes to the unobservable inputs.

The following tables set forth the Company's financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at December 31, 2017 and 2016:

 
Fair Value Measurements as of December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration due to seller
$
(2,075,000
)
 
—

 
—

 
$
(2,075,000
)

 
Fair Value Measurements as of December 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 
 
 
 
 
 
 
Contingent consideration due to seller
$
(1,700,000
)
 
—

 
—

 
$
(1,700,000
)
Assets:
 
 
 
 
 
 
 
Contingent consideration due from seller
$
421,272

 
—

 
—

 
$
421,272



The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):
 
Due to Seller Liability
Balance at January 1, 2016
$
(4,086,697
)
  Change in contingent consideration due to seller
112,954

  Payments of contingent consideration due to seller
2,273,743

Balance at December 31, 2016
(1,700,000
)
  Change in contingent consideration due to seller
(1,069,533
)
  Payments of contingent consideration due to seller
694,533

Balance at December 31, 2017
$
(2,075,000
)


The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3):
 
Due from Seller Asset
Balance at January 1, 2016
$
—

  Command purchase price adjustment
1,176,417

  Receipt of contingent consideration due from seller
(750,000
)
  Change in contingent consideration due from seller
(5,145
)
Balance at December 31, 2016
421,272

  Receipt of contingent consideration due from seller
(500,000
)
  Change in contingent consideration due from seller
78,728

Balance at December 31, 2017
$
—



For the year ended December 31, 2017, the Company recognized a net expense of $990,805 in selling, general and administrative expense due to the change in fair value determined by a level three valuation technique. For the years ended December 31, 2016 and 2015, the Company recognized a net benefit of $107,809 and a net expense of $201,452, respectively. These changes in fair value resulted from using revised forecasts that took into account the most recent performance at each acquired business, the effect of the time value of money and the satisfaction of the employee retention criteria.

For the years ended December 31, 2017, 2016 and 2015, the Company made contingent earn-out payments of $694,533, $2,273,743 and $2,945,833, respectively, to sellers of businesses acquired by the Company. During 2017 and 2016, the Company received $500,000 and $750,000, respectively, of contingent payments from the seller of Command. The Company did not receive any contingent payments from the seller of Command in 2015.