Show Me the Money – New Guidance for an Old Problem

Sawan Patel May 17th, 2017

New franchisors are surprised to learn that they are prohibited from providing financial information to prospective franchisees unless the information is contained in the form of a financial performance representation (“FPR”) in Item 19 of the franchisor’s Franchise Disclosure Document. The inability to provide this information leaves new franchisors with the difficult task of selling the franchise opportunity without being able to answer the question of “how much money can I make from the opportunity”.

However, with the issuance by the North American Securities Administrators Association, Inc. (“NASAA”) of the final NASAA FPR Commentary (the “Commentary”) on May 8, 2017, the process should have become arguably easier, or at the very least filled with less uncertainty.

The Solution

The Commentary provides clarity on what constitutes a reasonable basis for making an FPR. The Commentary clarifies that company-owned results can be used in making an FPR but details the information that must accompany the disclosure of those results. A franchisor can continue to use subsets of outlets that share a particular set of characteristics, but the subset selected cannot be misleading. For example, if a subset is based only on the highest grossing 10% of outlets, the lowest grossing 10% of outlets must also be included. Data from outlets that closed during the time period shown in the FPR may be excluded provided certain new disclosures are included concerning the number of outlets that closed during the period(s). Whenever “average” data is included in an FPR, “median” data must also be included, and vice versa. These guidelines, and others in the Commentary, should assist franchisors in making more accurate FPRs.