FDD Talk 2013: Statement of Average Gross Margin for Weed Man Businesses (2013 FDD)

Highlights of Weed Man’s Item 19 Financial Performance Representations (2013 FDD) – Part 2

Explanatory Notes for Table 4 – Statement of the 2012 Average Gross Margin

• Your gross margin is likely to differ from the 2012 Average Gross Margin stated below. The following statement of average gross margin does not account for certain costs and expenses you may incur on a regular basis, including royalty and service fees, advertising fees and expenditures, debt service, insurance, management, selling and administrative expenses, and other miscellaneous expenses.

• The Statement of Average Gross Margin of Certain Weed Man Franchisees During 2012 (the “Gross Margin Statement”) comprises the average gross margin of 41 Weed Man franchisees operating in the United States during the 2012 lawn care season.

• The Gross Margin Statement was compiled from financial statements submitted by 41 of the 94 Weed Man locations that were operational for the entire 2012 lawn care season, which is 43.6% of the Weed Man System in the U.S. The franchise operations on which the Gross Margin Statement is based were selected because they provided 2012 performance information to Weed Man.

• The cost of materials as a percentage of revenues actually incurred in fiscal 2012 by the 41 franchisees upon which the Gross Margin Statement is based ranges from 27.6% to 10.0%.

• The franchisor attributes this variance primarily to factors such as variances in pricing of lawn applications to customers, inventory control, and variances in the franchisees’ efficiency in lawn care applications.

• Twenty or 48.8% of the 41 franchisees upon which the Average Gross Margin Statement is based experienced a materials cost percentage that was either equal to or lower than the average materials cost percentage contained in the Gross Margin Statement.

• Material Cost varies by location and can be significantly affected by local agronomic factors, property size, product cost, and pricing of service.

• Vehicle expense as a percentage of revenues actually incurred in fiscal 2012 by the 41 franchisees upon which the Gross Margin Statement is based ranges from 18.1% to 2.0%.

• The franchisor attributes the variation to a number of reasons. Depending on the age of the business, some trucks are owned and others are leased. Normally, in the early years, this percentage is higher when the trucks are not owned. In the more mature franchises, the expenses reflect the higher maintenance costs associated with these vehicles.

• Twenty or 48.8% of the 41 franchisees upon which the Average Gross Margin Statement is based experienced a truck and equipment cost percentage that was either equal to or lower than the average truck and equipment cost percentage contained in the Gross Margin Statement.

• Vehicle expense does not include depreciation but includes leasing cost where appropriate.

• The cost of direct labor (Technician and Technical Supervisor Expenses) as a percentage of revenues actually incurred in fiscal 2012 by the 41 franchisees upon which the Gross Margin Statement is based ranges from 27.2% to 0.0%.

• Direct labor costs include compensation (including payroll taxes and other fringe benefits) for employees who perform lawn care services and exclude compensation of the franchisee and other administrative and marketing personnel.

• The franchisor attributes the variance in the percentage of direct labor cost primarily to the extent to which the franchisee employed others to perform application services, with franchisees that performed all application services themselves incurring no direct labor costs.

• Direct labor costs tend to be lower than average for full-time owner-operators with small operations, who performed most of the application services themselves, and tended to be higher than average for franchisees with large operations, where almost all of the application services were performed by employees. The variance is also due to the different levels of compensation paid to employees who performed application services.

• Twenty or 48.8% of the 41 franchisees upon which the Average Gross Margin Statement is based experienced a direct labor cost percentage that was either equal to or lower than the average labor cost percentage contained in the Gross Margin Statement.

• Technician Expense may vary depending on the local labor market and involvement of the principals of the franchisee in the operations of the business.

• Gross margin as a percentage of revenues actually incurred by the 41 franchisees upon which the Gross Margin Statement is based ranged from 40.5% to 75.0%.

• Twenty-three or 56.1% of the 41 franchisees upon which the Gross Margin Statement is based, met or exceeded the average gross profit margin percentage contained in the Gross Margin Statement.

Table 4 – Statement of the 2012 Average Gross Margin