Highlights of Great Clips’ Item 19 Financial Performance Representations (2013 FDD)

Explanatory Notes for Statement of Average Operating Cash Flow of Certain Great Clips Units

The following statement (referred to in the disclosure document as the “Operating Cash Flow Statement”) consists of the average sales, expenses, and operating cash flow of certain Great Clips units. The statement is based on a sample of 1,317 units that were open two years or longer as of January 1, 2012, and operating as of the date of this disclosure document (April 1, 2013).

The total eligible sample of units opened for two years or longer, as of January 1, 2012, consisted of 2,462 salons. The sample was reduced by eliminating any unit for which Great Clips had insufficient data to be reasonably assured of having accurate and complete expense information (1,145 units).

The 1,145 units eliminated due to insufficient data were not distributed evenly over the database, based on total sales. Of the missing salons, 461 had total sales at or above the median for the total sample and 694 had total sales below the median for the total sample. If all 1,145 units of these salons had been included in the sample, it would have reduced the median total sales in the sample by 6.0% and the operating cash flow by a somewhat larger percent.

The sales and expense data used in the preparation of this table was taken from actual unit operating statements, provided by the franchisee, for each unit in the sample. The time frame or accounting period of these operating statements was the most current available to Great Clips, but, in some cases, did not match the exact time frame from which sales figures were drawn. Therefore, some information was annualized to extract a full year worth of data.

The methodology used was to calculate each unit’s reported expenses as a percentage of total sales, then to apply this expense percentage to the total sales for 2012 to compute the operating cash flow figure. Great Clips feels that this is the method that produces the fairest representation of the current operating averages for these sample units.

The following operating cash flow statement should not be construed as actual or probable results that will be realized by a franchisee. It is based on operating results of units in operation since at least January 1, 2010.

Many Great Clips franchisees operate more than one salon. The average number of salons per franchisee who has operated Great Clips salons over five years is 5.7.

Revenues. Average sales based on actual operating results as reported by franchisees to Great Clips.

Labor. Includes all employee-related expenses including: wage, salary, bonus, commission, payroll taxes, insurance benefits, other benefits, and workers’ compensation expenses. Includes the cost of salon manager, but excludes, if identifiable, any labor expense related to general manager or franchisee.

Occupancy. Includes all rent, common area maintenance, real estate taxes, plus percentage rent paid, if any. Also includes any other lease-related charges such as maintenance, security, trash removal, merchant association dues or charges or shopping center promotional expenses.

Products. Includes the cost of all product purchased for resale or for back bar customer service usage plus all freight or delivery costs associated with this product.

Continuing Franchise Fees. All units in the System pay identical Continuing Franchise Fees of 6%. The model is not exactly 6% due to the fact that the franchisees predominantly use a cash rather than accrual basis for accounting purposes.

Advertising. All units in the System pay identical amounts of 5% of gross sales into the North American advertising fund. In addition, virtually all franchisees participate in other discretionary advertising on a local or regional basis.

Other. This category includes all other cash expense items and categories not included elsewhere. These would include: travel and entertainment, supplies, dues and subscriptions, telephone, utilities, non-real estate repairs and maintenance, insurance, postage, freight, bad debts, taxes and fees, cash over/short, recruitment expense, laundry, meals, equipment purchase, credit card charges, accounting and legal, employee theft/losses, deposits, bank charges, uniforms, licenses, contributions, meeting expenses, janitorial, bad checks, printing, inventory differences, computer charges, and convention expenses.

Operating Cash Flow. This figure does not include any provision for income taxes or for non-cash expenses, such as depreciation or amortization. It also does not include any reserve for future capital expenditures.

Newly opened units tend to have average sales and cash flow significantly below the average for the units included in the earnings claim sample below. This is especially true of new units opened by new franchisees in markets that have few existing units.

Certain markets have substantially higher real estate costs than others and any prospective franchisee is urged to verify this along with all other expense factors in relation to local market conditions.

Markets with many units and correspondingly larger cooperative advertising budgets tend to have units with higher revenues and cash flows than markets with few existing units.

Average Operating Cash Flow Statement

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