2. Business Acquisitions and Dispositions

Acquisitions

Sonic acquired one stand-alone pre-owned vehicle store for approximately $76.6 million during 2017. Goodwill in the amount of $60.0 million related to this acquisition was assigned to the Pre-Owned Stores segment. We anticipate that substantially all of the goodwill recorded in 2017 will be deductible for federal income tax purposes. The purchase agreement requires a deferred payment of $10.0 million after two years from the date of the acquisition to the seller who became an employee of Sonic. The purchase agreement also provides for potential additional variable payments to the employee over a ten-year period based on the financial performance up to a maximum of $80.0 million. Sonic is not obligated to make the variable payments up to a maximum of $80.0 million upon the termination of employment of the employee under certain circumstances. As a result, the deferred and variable amounts, if earned, are treated as compensation arrangements for post-combination services separate from the business combination, pursuant to ASC 805, “Business Combinations,” specifically ASC 805-10-55-25, therefore Sonic will recognize the accrual of the deferred and variable payments as compensation expense as earned. As of December 31, 2017, we had approximately $1.3 million accrued for deferred and variable payments, included in other long-term liabilities.

In addition to the stand-alone pre-owned vehicle dealership business discussed above, Sonic opened two new EchoPark stores during the year ended December 31, 2017.

Sonic acquired three stand-alone pre-owned vehicle stores and related real estate for approximately $15.9 million during 2016. These cash outflows were funded by cash from operations and borrowings under Sonic’s revolving credit and floor plan facilities. Sonic did not acquire any businesses during 2015. Acquisitions are included in the consolidated financial statements from the date of acquisition.

Dispositions

Sonic disposed of three dealership franchises during 2017 and four dealership franchises during 2015. Sonic did not dispose of any dealership franchises during 2016. The dispositions during 2017 and 2015 generated cash of approximately $38.2 million and $8.0 million, respectively. In conjunction with dealership dispositions, Sonic has agreed to indemnify the buyers from certain liabilities and costs arising from operations or events that occurred prior to sale but which may or may not have been known at the time of sale, including environmental liabilities and liabilities associated from the breach of representations or warranties made under the agreements. See Note 12, “Commitments and Contingencies,” for further discussion.

Prior to Sonic’s adoption of ASU 2014-08 beginning with its Quarterly Report on Form 10-Q for the period ended June 30, 2014, individual dealership franchises sold, terminated or classified as held for sale were reported as discontinued operations. The results of operations of these dealership franchises sold or terminated prior to March 31, 2014 are reported as discontinued operations for all periods presented. Dealership franchises sold on or after March 31, 2014 have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-08.

Revenues and other activities associated with disposed dealerships classified as discontinued operations were as follows:

	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Income (loss) from operations	$	(741	)	$	(1,100	)	$	(1,421	)
Gain (loss) on disposal		6			(1	)		-
Lease exit accrual adjustments and charges		(1,207	)		(1,020	)		(1,462	)
Pre-tax income (loss)	$	(1,942	)	$	(2,121	)	$	(2,883	)
Total revenues	$	-		$	-		$	-

Revenues and other activities associated with disposed dealerships that remain in continuing operations were as follows:

	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Income (loss) from operations	$	(2,329	)	$	(2,154	)	$	(6,214	)
Gain (loss) on disposal		11,188			(47	)		2,748
Property and equipment impairment charges		-			(81	)		(6,584	)
Pre-tax income (loss)	$	8,859		$	(2,282	)	$	(10,050	)
Total revenues	$	86,111		$	127,337		$	215,629

In the ordinary course of business, Sonic evaluates its dealership franchises for possible disposition based on various strategic and performance criteria. As of December 31, 2017, Sonic did not have any franchises classified as held for sale; however, in the future, Sonic may sell franchises that are not currently held for sale.