New Commentary on Financial Performance Representations

13 June 2017 Publication

International Law Office Franchise Newsletter

The North American Securities Administration (NASAA) has issued its final draft of its new financial performance representations (FPR) commentary, effective from May 8 2017.(1) NASAA issued the new FPR commentary(2) because the FTC Franchise Rule permits a franchisor to disclose financial results in Item 19 of the franchise disclosure document, provided that the franchisor has a reasonable basis. However, the rule does not define what constitutes a ‘reasonable basis’.(3) Therefore, the new FPR commentary provides a framework for what constitutes a reasonable basis for disclosing financial results in Item 19.

Below is a summary of some of the guidelines to franchisors in the new FPR commentary:

  • Use defined terms to describe data and sources of data.
  • When disclosing averages, also disclose the median of those numbers and vice versa, because the existence of outliers could skew the performance figures.
  • When disclosing the average of gross sales or a median, also include the highest and lowest number in the range.
  • When disclosing best performers (eg, top 10% of outlets), also include a corresponding disclosure of worst performers (eg, bottom 10% of outlets).
  • A franchisor with any operational outlets cannot make a disclosure based only on gross sales.
  • A franchisor may make a disclosure based on gross profit or net profit as long as the disclosure also includes material financial differences between company-owned outlets and operating franchise outlets.
  • A franchisor without company-owned outlets that discloses gross sales alone may not separately provide cost or expense data outside of Item 19 which a prospective franchisee could readily calculate net profits.

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