We continue with the third installment on Observations from the IFA Convention on the Ins and Outs of Financial Performance Representations (“FPRs”). Again, our thanks to Max Schott of Gray Plant Mooty for co-authoring this summary with me. This time, we summarize a few pointers from the roundtables about the preparation of FPRs.
FPRs come in all shapes and sizes. As long as a franchisor has a “reasonable basis” and “written substantiation” for an FPR at the time it is made, and includes the bases and assumptions underlying it in Item 19, the franchisor has a large amount of flexibility in crafting an FPR that fits it business and story. Generally, an FPR can be based on historic information from franchised units, company-owned units (those owned by the franchisor or its affiliate), or a combination of both – although some registration states likely will require that franchised and company-owned unit information be kept separate. FPRs based on historic information can be as simple as listing average gross revenues and/or gross profit (for example) of all franchised units, or as complicated as including full P&Ls for all franchised and company-owned units. It is up to the franchisor to decide the content of its FPR, with proper input from its accounting and legal teams. While the FTC Franchise Rule also allows a franchisor to prepare an FPR based on projections, we (like our attendees) have rarely seen FPRs of this type, presumably due to the fact that they are viewed as being harder to properly prepare and creating more risk. As mentioned in one of our sessions, if you are looking for FPR structuring tips, we recommend the fairly inexpensive book titled “How Much Can I Make?” that contains a number of actual FPRs (and, although we wish it were true, we do not receive any royalties from the publisher). In addition, you can access for free on the California and Minnesota websites FDDs that have been filed with the states, and take a look at what other franchisors are including in Item 19.
Next week, we will discuss the dangers of behavior that can be inadvertent FPRs.