Top 5 Things to Know about Item 19

If you are just getting into the franchising industry, the legal details may seem daunting at first. That’s why it’s always suggested to consult with an attorney that specializes in franchising to ensure you fully understand what’s in a brand’s Franchise Disclosure Document, or FDD.

One part of the FDD that frequently causes confusion is also one of the most important items: Item 19. To help break down what you need to know about Item 19, 1851 asked Kitt Shipe, franchise attorney at Shipe Dosik Law LLC, the top five things to know about it.

• The FTC Rule neither mandates nor prohibits providing financial performance representations to prospective franchisees.
• In general, a “financial performance representation,” or an “FPR,” is data regarding the revenue or profitability of a franchisor’s locations or company-owned outlets.

The overwhelming trend is to include an Item 19 disclosure.

• Twenty years ago, many franchise attorneys routinely advised franchisors to be weary of providing an Item 19, reasoning that it would be all-too-easy for clever franchisee attorneys to poke holes in the FPR and somehow assert that the Item 19 disclosure was misleading.
• In 2017, electing to include an FPR has now become the general rule, instead of the exception.
• There are a number of other reasonable explanations why a franchisor may decide to not include an FPR in its disclosure document.

FPRs vary widely both in terms of format and content.

• There are few specific technical requirements imposed on franchisors by the FTC Rule with respect to FPRs, and that is evident in the wide variation of Item 19 disclosures.
• Some franchisors choose to include only revenue information in their FPR on both franchised and corporate units, without cost information.
• Another common format for an FPR consists of presenting revenue and cost information on certain categories of cost, including labor, rent and COGS.

A franchisor that does not include an FPR in Item 19 may provide cost data outside of the disclosure document.

• If a franchisor does not include an Item 19 disclosure, it may still provide cost data to prospective franchisees.
• A franchisor cannot express costs as a percentage of revenue.

After the sale, a franchisor is free to provide financial information to its franchisees.

• The sharing of financial information is often crucial for benchmarking and analysis purposes within a franchise system, and is a key benefit that a franchisor can provide its franchisees.
• A franchisor may provide any type of financial information to its system franchisees including revenue, profits, costs, etc. once the sale is consummated.