What Can Your FPR Say? New Rules Ahead
The IFA Legal Symposium continues through today in Washington, DC.
New rules are just around the corner for what franchisors can and cannot say in their financial performance representations, also known as FPRs or Item 19, and two attorneys laid out some details yesterday at the IFA Legal Symposium in Washington, D.C.
“We all have a job to do, especially if you’re with larger systems,” said David Kaufmann with Kaufmann Gildin & Robbins, to the assembled attorneys (and at least one stray journalist) at the International Franchise Association’s 50th annual symposium. “Even as we speak, we franchise counsel have to make sure your clients understand these new rules and requirements: new definitions, new aggregations of data that is forbidden. We have to let them know now, because if we wait too long it will screw up the renewal process next year.”
Established franchisors will have to comply when they renew registrations and update franchise disclosure documents starting in January 2018 and after. New franchisors have a shorter time frame, said Susan Grueneberg, of Snell & Wilmer and a co-presenter.
She announced that the group who came up with the new rules, NASAA, voted Monday afternoon to adopt the commentary, as the guidelines are called, which have been three years in the making. NASAA stands for the North American Securities Administrators Association.
New franchisors, she noted, “better be sure you’re complying with it right now, because in 180 days you will be required to.”
The complexity of the new rules is rivaled only by the number of acronyms involved with this topic, so franchisors should get with their counsel quickly to figure out what data they should be collecting now on the financial performance of their units, in order to file the right kinds of updates for next year. But here are a few highlights:
-Gross or net profits based on company-owned store data must be adjusted for the “reasonably expected material financial and operational differences” of franchisee-owned outlets.
-Franchisors cannot create a subset of units and report only their numbers “if there are fewer than 10 total outlets at the franchisor’s last fiscal year end.”
-You can’t cherry-pick: “FPRs representing the top 10 percent of performers” for example, were viewed “as grossly misleading” by the NASAA group that wrote the new rules. “A subset based on the best-performing outlets requires a corresponding subset of the worst-performing outlets,” Kaufmann said.
As for projections, the two had many warnings. “It’s not like anything we’ve had before,” said Kaufmann about the new rules. “First of all, any projection must be linked to historic data. Any projection must be based on outlets substantially similar to the type of outlet being franchised. No more reliance on data from other brands.” And, “you cannot base a projection on industry reports.”
Finally, the new rules forbid disclaimers, Grueneberg said, but then she demonstrated how difficult it is to distinguish a disclaimer from an explanation. She showed on the screen several actual paragraphs pulled from FDDs, and then asked the audience to hold up their signs that said “disclaimer” on one side and “explanation” on the other. The audience of attorneys was all over the place in their opinion of which was which.
All in all, the presentation demonstrated why top franchise attorneys command hundreds of dollars in fees an hour, and journalists pull in, um, much less. My free advice: Contact your attorney to get the low-down on the new rules ASAP.