The North American Securities Administration (NASAA) has issued the 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 Federal Trade Commission 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.
The new FPR commentary will apply to updates made after the effective date. The effective date is the later of 180 days after the date of NASAA's adoption on May 8 2017 or 120 days after the franchisor's next fiscal year end, if the franchisor has an effective franchise disclosure document as of NASAA's adoption date.
(1) This is the second update in a series on recent franchising developments across the United States - for earlier stories please see "Revised SBA regulations and addendum".
(2) North American Securities Administrators Association, Inc, NASAA Legal Department, "NASAA Franchise Commentary on Financial Performance Representations" (effective May 8 2017).
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