How to read Item 19 in a franchise disclosure document

Item 19 of the Franchise Disclosure Document is where a franchisor may describe how existing units perform. Including it is optional. Under the FTC Franchise Rule, a franchisor that makes financial performance representations must include them in Item 19 and have a reasonable basis and written substantiation for them. A franchisor that makes none must say so in Item 19.

The federal rule requires the FDD to be given to you at least 14 calendar days before you sign a binding agreement or pay any money, and some states add their own registration and disclosure requirements. Use the time, and have a franchise attorney and an accountant review the documents.

This guide explains what Item 19 can and cannot tell you, how to turn it into a realistic estimate of what a unit might earn you, and what to ask existing franchisees.

What Item 19 is

A financial performance representation is any statement, oral or written, that tells a prospective franchisee something specific about the actual or potential sales, income or profit of franchised or company-owned units. It can be a historical figure, such as last year's sales across a group of units, or a projection. Most systems that make one use historical figures.

The rule asks a franchisor to explain the basis for what it shows. In practice that means stating which units are included, the period covered, the material assumptions, and whether the figures are audited. When a representation covers only some units, the franchisor is expected to describe how that group differs from the rest and how many units reached or beat the figure. Item 19 also carries a caution that your own results may differ.

If a franchisor does not make an Item 19 representation, its staff generally should not give you sales or profit figures in conversation either. There are narrow exceptions, such as figures for a specific existing unit you are buying. If someone offers you numbers outside the FDD, ask why they are not in Item 19 and tell your attorney.

A blank Item 19 is not by itself a bad sign, and a full one is not by itself a good sign. Some franchisors leave it out because their units vary too much to summarise honestly. Others include a single flattering figure. What matters is whether the disclosure, the rest of the FDD and what franchisees tell you all point the same way.

What to check in Item 19

• Which units are counted: franchised, company-owned or both, and whether new, relocated or closed units are excluded.
• How many: an average across 180 units means something different from one across 12.
• Average or median: a few very strong units pull an average up. Look for medians, quartiles, or how many units met or exceeded a figure.
• Which line: gross sales alone says nothing about profit. A disclosure that reaches cost lines or store-level profit tells you far more.
• Which units the cost lines come from: company-owned stores may not pay a royalty and may buy at different prices.
• The period: a year with an unusual event, a menu change or a price increase can make one period look unlike the next.
• The notes: the definitions sit in the footnotes. Read every one.

Read it beside these items

• Items 5 and 6: initial fees and ongoing fees, including royalty, ad fund, technology and training.
• Item 7: estimated initial investment. Compare with what franchisees tell you they spent.
• Item 8: required suppliers and whether the franchisor earns revenue from them.
• Item 11: the franchisor's support, and the typical time from signing to opening.
• Item 20: outlet openings, transfers, terminations, non-renewals and closures, plus contact details for current franchisees and those who left in the last fiscal year.
• Item 21: the franchisor's financial statements.

Item 20 is the most useful check on Item 19. If Item 19 shows strong sales but Item 20 shows many transfers and closures, the figures may be describing the units that survived.

Build your own P&L

Start from a sales figure you think is realistic for your market, not the top quartile. Subtract prime cost in your brand's typical range, rent for your site, the royalty and ad fund rates from Item 6, other operating costs, and debt service on your Item 7 investment. What's left is what the business might pay you. If it only works at the average, treat that as a warning. How to calculate prime cost.

The formulas:

• Store-level profit = net sales − prime cost − occupancy − royalty − ad fund − other operating costs
• Cash to owner = store-level profit − annual debt service
• Royalty and ad fund = net sales × the rates in Item 6

The example below uses a fictional concept and assumed figures. It is not drawn from any real FDD.

The result is thin. Suppose food and paper, royalty, ad fund and card fees move with sales while labor, rent and the loan mostly do not. Then roughly 40 cents of each lost sales dollar is saved and 60 cents comes out of profit. A 5% drop in sales, or $55,000, would take about $33,000 of the $37,000. Rerun the estimate at a lower sales figure and at a higher prime cost before deciding. If the unit only pays you at the disclosed median, you are betting on being above typical.

Questions for franchisee calls

Call a wide sample of franchisees from Item 20, including some who left. Ask:

• How long did it take to break even, and how close was your investment to Item 7?
• How do your sales compare with Item 19, and why?
• What are your prime cost and occupancy as a share of sales?
• What does field support actually do for you in a month?
• What would you do differently if you opened again?

Do not rely on the names the franchisor suggests. Pick your own from the full list, and include owners in markets like yours. Ask the same questions on every call and write the answers down, so you can compare them side by side afterwards. Owners who left are often the most candid about what the first two years cost.

A step-by-step checklist

1. Confirm the FDD issue date and that you received it at least 14 calendar days before signing or paying.
2. Read Item 19 in full, including every footnote, and write down which units are included.
3. Note whether figures are averages or medians, and how many units met or beat each one.
4. Pull fees from Items 5 and 6 and the investment range from Item 7.
5. Compare Item 19 with the openings, transfers and closures in Item 20.
6. Build your own P&L at a conservative sales figure and at a higher prime cost.
7. Call franchisees you chose yourself, including at least a few who left.
8. Take your estimate, notes and questions to a franchise attorney and an accountant.

Common mistakes

• Treating an average as what a typical unit earns.
• Reading a sales figure as if it said something about profit.
• Assuming company-owned unit costs apply to a franchised unit.
• Ignoring how many units were excluded and why.
• Planning around the top quartile because your site feels like a strong one.
• Calling only the franchisees the sales team recommends.
• Trusting figures given verbally that do not appear in Item 19.

For franchisors

Specific disclosures, meaning medians and quartiles, unit counts, maturity, and cost lines you can substantiate, are easier for candidates to trust, and they'll check the numbers on validation calls either way. A clean, consistent set of unit data, measured the same way across stores, also makes substantiation easier. Any change to Item 19 should go through franchise counsel. For the operating side of the same question, see how to improve franchisee profitability.

Where Franlever fits

Inside a franchise system, Franlever connects to each store's POS and compares every store with its own normal range and the brand median, which gives a franchisor consistent unit data measured the same way everywhere. Disclosure decisions stay with the franchisor and its counsel. See Franlever for franchisors.

General information for restaurant and franchise operators, not legal, tax, accounting or financial advice. Figures in examples are illustrations, not predictions or promises of results. Laws and platform policies change and differ by location, so check the current rules and talk to a qualified advisor about your situation.