Financial Performance Representations
Excerpt from the Papa Murphy's Franchise Disclosure document issued April 3, 2017
The FTC’s Franchise Rule permits a franchisor to disclose information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets if there is a reasonable basis for the information and if the information is included in the Disclosure Document. Financial performance information that differs from that included in ITEM 19 may be given only if: (1) a franchisor provides the actual records of an existing outlet you are considering buying; or (2) a franchisor supplements the information provided in this ITEM 19, for example, by providing information about possible performance at a particular location or under particular circumstances.
In the sections below, we have provided
- Unaudited statement of system store performance, and
- Unaudited benchmark costs for franchised stores.
Information for franchise-owned stores has been taken from self-reported weekly sales and period profit and loss statements. We have not audited or verified these figures or reports nor have we asked questions of the submitting franchisees to determine whether the information provided to us is in fact accurate and complete, although we have no reason to believe it is unreliable. We do not know whether the information was prepared consistent with generally accepted accounting principles.
The amount of sales realized and costs and expenses incurred will vary from store to store. The sales, costs and expenses of your Franchised Store will be directly affected by many factors, such as the Franchised Store’s size, geographic location, menu mix, and competition in the marketplace; the presence of other Papa Murphy’s stores; the quality of management and service at the Franchised Store; contractual relationships with lessors and vendors; the extent to which you finance the construction and operation of the Franchised Store; your legal, accounting, real estate and other professional fees; federal, state and local income, gross profits or other taxes; discretionary expenditures; and accounting methods used. You should, therefore, use this analysis only as a reference.
Where we state percentages in this section, those percentages have been rounded to the nearest one-tenth. Where we report dollar amounts, they have been rounded to the nearest dollar.
You are urged to consult with appropriate financial, business and legal advisors to conduct your own analysis of the information contained in this section.
System Store Performance
As of September 26, 2016 there were 1,541 domestic Papa Murphy’s Take ‘N’ Bake Pizza stores open. Stores participating in the Pre-Sale Development Program were not included in the System Store Performance. The statements in this System Store Performance section are based on information reported by the 1,420 domestic Papa Murphy’s Take ‘N’ Bake Pizza stores, both franchise-owned and company-owned, that were open and operating for all of the trailing 52 weeks ending on September 26, 2016. These stores represent 133 company-owned stores and 1,287 franchise-owned stores (collectively referred to herein as “System Stores”). The System Stores were divided into three groups with the same number of stores in each group based on Net Sales results: top third (“High”), middle third (“Medium”), and lower third (“Low”).
The average annual Net Sales of the System Stores was $592,960 (“System Store Average”) per store. Of the 1,420 stores, 568 (or 40.0%) met or exceeded this average. These System Stores offer substantially the same menu and product mix that your Franchised Store will offer.
The High Group’s average Net Sales are $899,719; the Medium Group’s average Net Sales are $535,963; and the Low Group’s average Net Sales are $343,317. The ranges of Net Sales and averages within the High, Medium and Low categories are listed below:
|Number of Stores||473||474||473|
|Average Net Sales by Category||$899,719||$535,963||$343,317|
|Number of Stores Exceeding Average Net Sales by Category||186||220||264|
|Percentage of Stores Exceeding Average Net Sales by Category||39.3%||46.4%||55.8%|
|Total System Store Average Net Sales||$592,960|
This section is based on the unaudited sales and operating costs reported for 850 franchised stores that were open and operating for all of the trailing 52 weeks ending on September 26, 2016, our fiscal third quarter of 2016, and for which the franchisee submitted profit and loss statements in the appropriate format for this period. This section excludes those stores where we found more than a two percent variance between sales data provided in weekly sales reports and sales data reported in profit and loss statements for the same store (“Benchmark Stores”). Although we have no information or basis to believe the data regarding Benchmark Stores is inaccurate, we are pursuing initiatives to automate profit and loss reporting with the goal of further increasing the amount and accuracy of the available data. Note: As franchised stores have 90 days to submit year-end financial statements, fiscal year 2016 sales and operating costs are not currently available.
The reported average Net Sales for the Benchmark Stores over the 52 week period was $635,317. The range of Net Sales was between $184,569 and $1,688,300. These results have not been audited and though the numbers appear to accurately reflect the level of results expected, there is no guarantee that they are in whole or part correct.
|Number of Stores||283||284||283|
|Average Gross Sales||1||$1,096,381||$679,218||$441,158|
|Average Discounts (on Gross Sales)||2||13.6%||14.3%||14.5%|
|Average Net Sales||3||$947,062||$581,807||$377,269|
|Number of Stores Exceeding Average Net Sales||110||128||155|
|Percentage of Stores Exceeding Average Net Sales by Category||38.9%||45.1%||54.8%|
|Total Store Average Net Sales||$635,317|
Below are represented as a % of Net Sales
BENCHMARK STORE COSTS BY CATEGORY
|Average Employee Labor||5||16.4%||16.8%||18.5%|
|Average Payroll Taxes||7||2.3%||2.3%||2.4%|
|Average Rent & CAM||9||4.2%||6.3%||8.7%|
|Average Other Store Expenses||10||7.5%||9.2%||11.4%|
|Average Store Contribution||12||19.2%||12.3%||3.6%|
The notes to the above table are an integral part of the bases and assumptions of this analysis. You should particularly note the following:
The table of Benchmark Stores’ data is based upon the self-reported profit and loss statements. The average sales and average costs reflected in the analysis are of the certain stores included in Benchmark Stores and should not be considered as the actual or potential sales, costs, income or profits that you will realize. We do not represent that any franchisee can expect to attain the sales, costs, income or profits described in this section, or any particular level of sales, costs, income or profits. In addition, we do not represent that any franchisee will derive income that exceeds the initial payment for or investment in the Franchised Store. The individual financial results of any Franchised Store are likely to differ from the information described in this section, and your success will depend largely on your ability. Substantiation of the data used in preparing this analysis will be made available on reasonable request.
This analysis of benchmark costs does not include any estimates of the federal income tax that would be payable on the net income from a store or state or local net income or gross profits taxes that may be applicable to the particular jurisdiction in which a store is located. You are strongly urged to consult with your tax advisor regarding the impact that federal, state and local taxes will have on the amounts shown in the analysis.
- Average Gross Sales. The gross sales figures set forth above represent all food and beverage sales before any coupons or other discounts are taken. It does not include sales taxes collected.
- Average Discounts. The percentages reported above include coupons and discounts and other price reductions offered on promotional items or offers. This percentage may also include any discount offered to employees. The percentage is calculated on gross sales.
- Average Net Sales. The sales figures set forth above represent all food and beverage sales, less discounts. This is the amount on which you will calculate your royalty payments.
- Average Cost of Goods (“Average COGS”). Average COGS includes all food inventory and packaging delivered to the store and used in creating the product for sale, but excludes cleaning supplies and similar items. We negotiate contracts for quantity and price for both beverages and certain food products to take advantage of volume discounts. (See ITEM 8.)
- Average Employee Labor. Average employee labor reflects hourly wages, including both regular and overtime wages (including crew, assistant managers, shift leaders), for food preparation and service. No corporate management personnel are included in labor costs. The amount of hourly labor necessary to operate a Franchised Store will vary from unit to unit, but should incrementally increase or decrease with the sales volume of the Franchised Store. Hourly wages may vary significantly by geographic location, the supply of and demand on the local labor pool, and state and federally mandated minimum wage laws. Labor includes wages only and does not include payroll taxes, medical or workers compensation insurance or 401(k) plan contributions. You will have sole control over the staffing and scheduling of labor at the Franchised Store.
- Average Management. Management costs include payroll expenses (such as salaries, bonuses, sick time and vacation) for the Franchised Store manager. The number of managers may vary based on sales volume and your requirements may differ from those of a Benchmark Store. In some cases, a franchisee serves as the store manager and draws little or no salary.
- Average Payroll Taxes. Average payroll taxes include unemployment taxes (both federal and state), FICA, employee injury insurance or workers compensation where required.
- Average Advertising. This category is comprised primarily of four types of expenditures:(a) local store marketing and merchandising, (b) contribution to the Brand Marketing Fund (formerly known as the Advertising and Development Fund), (c) expenditures on Multi- Area Marketing Programs and Promotions, as defined in the Franchise Agreement, and (d) your Franchised Store’s designated percentage contribution to your local advertising cooperative, which can be different for each designated marketing area.
- Average Rent and Common Area Maintenance (“Average Rent & CAM”). Rent and CAM includes rent and lease costs, common area maintenance expenses and tax and insurance due the landlord. Rent and lease costs include the base rent and any percentage rent. Common area maintenance costs typically include franchisee’s pro rata charges for items such as parking lot maintenance, lighting, real estate taxes, taxes on the common areas and costs of maintaining the common areas. Rental costs will vary as a result of space requirements, location of the Franchised Store, local market conditions and other factors.
- Average Other Store Expenses. Other store expenses include the cost of bank fees, accounting and payroll services, utilities, repairs and maintenance, telephone, employee benefits, insurance, janitorial, smallwares, taxes and licenses, broadband/Internet, point- of-sale system costs, credit card processing charges, online ordering fees, uniforms, and laundry and supplies. Utilities include electricity, gas, water and telephone costs for the operation of the Franchised Store. The pro rata share of common area utility costs is included under rent and lease payments. (See Note 9.) These costs are subject to local market conditions and may vary depending on the geographic location of the Franchised Store and other factors. This costs category also includes personal property taxes, other real estate taxes not included in rent and lease and other operating licenses required by state and local agencies. You should investigate property taxes in the area in which you plan to locate your Franchised Store.
- Average Royalties. Royalties are a fee equal to 5 percent of your Franchised Store Net Sales.
- Average Store Contribution. The store contribution represents revenue less expenses described herein, and this figure does not reflect other costs which you may incur as a franchisee, which may include general and administrative costs, depreciation (consult with your tax advisor regarding depreciation and amortization schedules and the period over which the assets may be amortized or depreciated as well as the effect, if any, of recent and proposed tax legislation), and financing costs, if any. In addition, you will also be subject to local state and federal income taxes which are not reflected in the preceding table.
New Store Performance
Of the 104 new stores opened in fiscal year 2016, 81 stores had 12 or more full operating weeks as of the week ended January 2, 2017. (In all cases, the first partial week of operation has been excluded due to inconsistency in operations for this week.) The average weekly Net Sales for individual stores during the first 12 full operating weeks was $7,418. Of the 81 stores, 33 (40.7%) met or exceeded this average. The actual annual average Net Sales achieved may vary due to seasonality, location characteristics, owner involvement, marketing plans and competition, as well as other factors disclosed in this Disclosure Document.
Other than the preceding financial performance representations, we do not make any financial performance representations. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future revenue and/or income, you should report it to the franchisor’s management by contacting Victoria Tullett, Papa Murphy’s International LLC, at 8000 NE Parkway Drive, Suite 350, Vancouver, Washington 98662, (360)449-4122, the Federal Trade Commission, and the appropriate state regulatory agencies.