What is an Item 19 in franchising?

One of the most important documents you will come across while considering investing in a franchise, is the Franchise Disclosure Document (FDD). This document provides crucial information that helps potential franchisees assess the viability of a franchise opportunity. One section that stands out in the FDD is Item 19, which is devoted to financial performance representations.

So, what is an Item 19 in franchising, and why is it important? Let’s dive in to understand the significance of this section, what it includes, and how it can impact your decision-making process when purchasing a franchise.

The Franchise Disclosure Document (FDD) is a legal document that franchisors are required to provide to prospective franchisees before entering into any franchise agreement. The FDD contains 23 items, each providing a comprehensive overview of the franchise system. One of these items is Item 19, which specifically addresses financial performance representations (FPR).

In essence, Item 19 in franchising is a section of the FDD that gives potential franchisees insight into the financial performance of the franchise system. This section is not mandatory, but if a franchisor chooses to include an Item 19, they must do so accurately and in compliance with the guidelines set by the Federal Trade Commission (FTC).

What is Included in Item 19?

Item 19 provides financial performance data that may include a range of metrics, such as:

• Average revenue: The average sales figures for existing franchise units.
• Median revenue: The middle value of sales among franchisees, which can offer insights into how franchise units are performing across the system.
• Gross sales or gross profits: This may include specific breakdowns of total sales or profits, allowing potential franchisees to gauge how profitable a unit might be.
• Operating costs: Some franchisors may include an outline of estimated operating expenses, helping prospective franchisees understand what their costs might be.
• Profit margins: The difference between revenues and operating expenses that indicate the overall profitability of franchise units.

Franchisors provide these financial metrics based on the actual performance of existing franchise units. 

The Importance of Item 19 for Franchisees

For prospective franchisees, Item 19 is crucial in evaluating the potential financial return on investment (ROI) of the franchise. Here’s why:

• Understanding Profitability: Item 19 helps provide a snapshot of how well other corporate units or franchisees are doing. By looking at averages, medians, and specific financial data, you can get a better sense of what profitability will look like with the company.
• Decision-Making: This data can help you assess whether the franchise is a good fit for your financial goals and business capabilities.

The Role of Item 19 for Franchisors

From a franchisor’s perspective, Item 19 is an important section for the brand. Great potential franchisees are more likely to invest in a franchise if they can see how existing locations are profitable and performing well.

For prospective franchisees, understanding Item 19 is helpful to assess the profitability and risks of a franchise investment. For franchisors, offering transparent and accurate financial representations shows trustworthiness of the brand, attracts great franchisees, and ultimately grows the franchise system.