New Commentary on Financial Performance Representations

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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