What Item 19 Contains
Item 19 is the only place where a franchisor can legally make financial performance claims. The format and content vary widely between franchisors - some provide extensive data while others provide none at all.
Types of Financial Data in Item 19
- Gross Sales/Revenue: Total sales before expenses. Most common but least useful metric alone.
- Cost of Goods Sold (COGS): Direct costs of products or services sold. Helps calculate gross margin.
- Operating Expenses: Rent, labor, utilities, supplies, and other operating costs.
- EBITDA/Net Profit: Earnings before interest, taxes, depreciation, and amortization - a key profitability measure.
- Owner Benefit/Cash Flow: The most useful metric - what the owner actually takes home.
Common Item 19 Formats
Historic Performance
Actual results from existing franchise locations over a specific period. Most reliable data.
Subset Performance
Data from a specific group (top performers, mature locations, certain regions). May not represent typical results.
Average/Median Figures
Statistical summaries. Median is often more representative than average, which can be skewed by outliers.
Quartile Breakdowns
Shows distribution (top 25%, middle 50%, bottom 25%). Very useful for understanding range of outcomes.
Why Item 19 Is Critical for Franchise Buyers
Understanding potential financial returns is essential before making a significant investment. Item 19 provides the foundation for realistic financial projections and ROI analysis.
Investment Validation
Financial data helps you validate whether the investment makes sense given required capital (Item 7) and ongoing fees (Items 5-6).
Loan Applications
Banks and SBA lenders require financial projections. Item 19 data provides a documented basis for loan applications.
Break-Even Analysis
Understanding revenue levels helps calculate how long before your franchise becomes profitable.
Franchise Comparison
Item 19 data allows you to compare potential returns across different franchise opportunities.
Critical Insight
Approximately 60-65% of franchisors now provide some form of Item 19 disclosure, up from about 40% a decade ago. Franchisors with strong unit economics increasingly use Item 19 as a competitive advantage in franchise sales.
How to Analyze Item 19 Data
Step 1: Understand What Is Being Measured
Read the definitions: Understand exactly how each metric is calculated. "Net Sales" may or may not include certain revenue.
Note what is excluded: Are owner salaries included? What about debt service, depreciation, or certain expenses?
Check the time period: Is this annual data? How recent is it? Economic conditions may have changed.
Step 2: Analyze the Sample
Sample size: How many locations are included? Larger samples are more reliable.
Inclusion criteria: Are all locations included, or only a subset? Excluding poor performers inflates results.
Location types: Are these corporate locations, franchisee locations, or both? Corporate stores may perform differently.
Geographic representation: Does the data include locations similar to your target market?
Step 3: Look at the Distribution
Median vs. Average: If only average is provided, high performers may be skewing results upward.
Percentage achieving: What percentage of franchisees achieved or exceeded the stated figures?
Range of results: What is the spread between top and bottom performers? Large gaps indicate inconsistent results.
Plan conservatively: Base your projections on median or below-median performance, not top performers.
Step 4: Calculate Key Metrics
Sales-to-investment ratio: Divide average sales by Item 7 total investment. A ratio of 2:1 or higher is generally good.
Profit margin: If profit data is provided, calculate net margin. Compare to industry benchmarks.
Payback period: How many years to recoup your initial investment based on projected cash flow?
ROI calculation: Calculate return on investment using conservative profit estimates.
What to Do When There Is No Item 19
If the franchise does not provide Item 19, you need to gather financial performance information through other means. This requires more work but is absolutely essential.
Alternative Sources of Financial Data
- Existing franchisees (Item 20): Contact franchisees listed in Item 20. Ask about actual revenue, expenses, and profitability.
- Former franchisees (Item 20): Also contact those who left the system. They may share insights about financial struggles.
- Franchisee associations: Some systems have independent franchisee associations that share financial benchmarks.
- Business brokers: Brokers selling existing franchise locations may have financial data from listings.
- Industry benchmarks: Research typical financial performance for similar businesses in your industry.
Red Flags in Item 19
Only Top Performers Included
If data excludes locations open less than X years or only includes "mature" locations, results may not represent typical performance.
Gross Sales Only
Revenue without expense data is nearly useless. High sales with high costs could mean low or negative profit.
Corporate Location Data
Corporate-owned locations may have advantages (better sites, no royalties calculated as expense) that franchisees do not have.
Low Percentage Achieving Stated Results
If only 20% of franchisees achieve the stated average, most franchisees are performing below that level.
Questions to Ask the Franchisor
- 1.Why was this particular subset of locations chosen for Item 19 disclosure?
- 2.What percentage of all franchisees achieved or exceeded the stated averages?
- 3.What are typical first-year, second-year, and third-year financial results?
- 4.What factors most significantly impact financial performance differences between locations?
- 5.Can you provide contact information for franchisees with results similar to Item 19 averages?
Frequently Asked Questions
What is FDD Item 19?
Item 19 is where franchisors may disclose financial performance representations (FPRs), also known as "earnings claims." This can include actual or potential sales, income, gross profits, or net profits of franchise outlets. Item 19 is optional - franchisors are not required to include financial performance data, but if they make any claims, they must do so in Item 19.
Why do some franchises not include an Item 19?
Franchisors choose not to include Item 19 for various reasons: they may have inconsistent results, newer systems may lack sufficient data, or they may want to avoid liability. However, the absence of Item 19 should not automatically disqualify a franchise - it just means you need to gather financial data directly from existing franchisees.
Can I trust the numbers in Item 19?
Item 19 data must have a reasonable basis and be presented with required context and assumptions. However, these numbers often represent averages or specific subsets of franchisees. Always read the footnotes and assumptions carefully, and validate with actual franchisee conversations.
What is the difference between gross sales and net profit in Item 19?
Gross sales is total revenue before any expenses. Net profit is what remains after all costs (rent, labor, supplies, royalties, marketing fees, etc.). Some Item 19s only show gross sales, which tells you little about actual profitability. Net profit or owner benefit data is much more valuable.
Should I avoid franchises without Item 19 disclosure?
Not necessarily. Many successful franchise systems do not provide Item 19. However, without it, you must do more due diligence by speaking with multiple existing franchisees to understand typical financial performance. Never invest without understanding potential returns.