How to Review Your Item 19

As part of the FDD, the Item 19 section, while not mandatory, discloses earnings claims of existing franchise owners and corporate locations. This fine print has important information to consider when analyzing which franchise, if any, to buy into.

This can be one of the most influential factors in an entrepreneur’s decision when buying a franchise, so it’s important to know how to read it.

The most important thing to know is that Item 19 does not tell you how much you can expect to make as a franchisee.

We spoke with Sean Fitzgerald, chief development officer of No Limit Agency*, to discuss the top tips for those interested in franchising.

Item 19s are not all the same – Although the FDD is formatted the same for all franchises (e.g. Item 7 Initial Investment), Item 19 has no standard format requirements. Thus, comparing Item 19s with other FDDs is not an “apples to apples” comparison even if they’re for similar businesses.

Read the footnotes – The footnotes will explain exactly how the performance representation was calculated and what made up the data set or sample size. Fitzgerald said he’s seen some brands only list AUVs of corporate locations and not their franchisees. Having the AUVs of the franchisees would have been a better indication of what to expect as a franchise owner. You may find other exclusions from the sample size that must be disclosed in the footnotes.

Check the ratios – All financial performance representations must show how many franchisees hit or exceed the average. A low number meeting or exceeding the averages means the top producing franchisees are skewing the average high. This is more prevalent in smaller brands where the sample size is low, Fitzgerald said.

Validate the numbers with franchisees – Remember what the franchisor elects to put in the Item 19 is completely up to them. Most likely they are only going to put in the results that look good. Therefore, Fitzgerald recommended talking to existing franchisees to capture the entire financial picture.