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Writer's pictureJack Johnson

Mastering Item 19 Franchise Disclosure Document: Essential Financial Insights

Updated: Aug 20


The Item 19 of the franchise disclosure document is a critical component that presents vital data regarding the financial performance of a franchised business. Familiarizing yourself with this segment can assist you in making an educated decision regarding potential earnings from investing in a franchise.


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The Item 19 of the franchise disclosure document is a critical component that presents vital financial performance information regarding the financial performance of a franchised business. Familiarizing yourself with this segment can assist you in making an educated decision regarding potential earnings from investing in a franchise.


Key Takeaways


  • Item 19 of the Franchise Disclosure Document (FDD) mandates franchisors to provide financial performance representations (FPRs), which include historical and forecasted financial data, facilitating transparency and enabling prospective franchisees to gauge potential returns on investment.

  • Accurate Item 19 disclosures require franchisors to offer complete historical financial data, including gross sales, profits, and key performance indicators, and to provide substantial assumptions for projected performance, thereby ensuring prospective franchisees can make well-informed judgments.

  • Compliance with federal and state regulations is crucial for franchisors, as it ensures the legitimacy of the financial information presented in Item 19, with appropriate state regulatory agencies playing a vital role in enforcing these standards and addressing any unauthorized representations.


Understanding Item 19 in the Franchise Disclosure Document

The section titled Item 19 within the franchise disclosure document is essential, as it presents financial performance representations made to prospective franchisees. This area details any specific information a franchisor offers about either actual or potential sales for a franchised business. Should a franchisor elect to provide this type of representation, its inclusion in Item 19 becomes mandatory.

Historical data regarding the following may be found in Item 19:

  • Revenue from gross sales

  • Expenses related to goods sold

  • Overall profit margins

  • Earnings before interest, taxes, depreciation and amortization (EBITDA)

It also includes other metrics that are key performance indicators related to sales and client interactions.


Having such disclosures ensures both integrity and validation of all types of financial statements issued by the franchisor during recruitment stages. Providing these declarations shields brands from unwarranted claims while granting individuals considering purchasing franchises an enhanced understanding of their potential investment outcomes.


Key Requirements of Item 19


Franchisors cannot make a financial performance representation unless they include the relevant financial information in Item 19 of the Franchise Disclosure Document (FDD). Such representations can cover a range of financial aspects including past performance data and future projections or pro-forma statements. It is imperative for franchisors to specify if these figures pertain to historical earnings or are anticipations of what might be earned in the future.


In order to assist prospective franchisees in making well-informed decisions, it’s essential that all substantial facts and underlying assumptions are disclosed transparently. Franchisors should provide explicit warnings that individual franchisees’ financial outcomes may deviate from those depicted in Item 19. Ensuring this clarity not only fosters trust, but also ensures adherence to pertinent federal and state laws governing franchises.


Historical Financial Performance Data

Item 19 should present a detailed account of the franchise system's financial performance, detailing which outlets are included in the analysis, over what period the data were collected and how many locations were part of this assessment. It is essential for franchisors to clarify whether all their existing outlets contribute to the data or only selected ones that share certain attributes.

It is imperative that disclosures incorporate:

  • A count of franchisees constituting the group

  • The tally of participating outlets that submitted actual data on financial performance

  • The proportion of those venues attaining the disclosed levels of success

  • Explicit information concerning when these outcomes in terms housing market development occurred

  • Such comprehensive details are mandated to ensure stakeholders receive a complete understanding of historical financial results.



Forecasted Financial Performance

Franchisors must provide detailed explanations of the significant assumptions and principal elements that support their projected financial outcomes. This disclosure should cover any economic, market situations or additional pertinent factors which may influence anticipated results.


To help prospective franchisees independently assess the credibility of predictions regarding a franchisee’s future financial performance, such as future income, they are expected to disclose the foundations and premises used in crafting these forecasts. To formulate these projections, franchisors often utilize resources like market research, statistical evaluations, and historical profit-and-loss statements from existing


Supplemental Financial Information

Franchisors are permitted to furnish detailed financial performance representations for certain sites or models, provided that these supplemental FPRs are documented and contain all the mandatory disclosures as per Item 19, including potential financial performance. The FTC Rule allows franchisors to present these additional FPRs with an explanation of how they differ from the initial financial performance representation in the Franchise Disclosure Document (FDD).


Even in cases where franchisors choose not to provide general FPRs under Item 19, they have the latitude to share actual operating results pertaining to a particular franchise location that is on sale. This provision offers the franchisor room to offer prospective franchisees precise financial data tailored to individual outlets.


Importance of Financial Performance Representations for Prospective Franchisees

Prospective franchisees depend on financial performance representations (FPRs) for crucial metrics and data that substantiate the credibility of a franchise brand. Without accurate financial performance data, determining the economic viability of purchasing a franchise can be challenging. Access to these FPRs is imperative for evaluating the financial performance of a potential investment.


Even when the numbers are not particularly impressive, franchisors should provide vital financial data. Transparency in sharing such information fosters trust among potential franchisees. Because they lend reliability to transactions, FPRs are valued by franchise brokers as they simplify attracting and securing deals with prospective investors in franchises. Ultimately, FPRs empower informed decision-making by helping individuals assess possible returns on their investments into franchises.


Legal Framework Governing Item 19

The regulatory framework for Item 19 is comprised of guidelines from the North American Securities Administrators Association (NASAA), oversight by state regulatory agencies, and rules set forth by the Federal Trade Commission (FTC). According to FTC regulations, a Financial Performance Representation can be any claim that suggests or confirms a certain range or specific level of actual potential sales income gross profits, or net earnings. Franchisors are allowed under this rule to share financial performance data in their disclosure document as long as they possess a reasonable basis for such information.

To ensure fidelity and substantiation of financial performance representations, adherence to NASAA’s standards along with compliance with the Federal Franchise Rule is required. In circumstances where franchisors elect not to make an FPR, they must explicitly declare so within their franchise disclosure document (FDD).


Best Practices for Drafting Item 19

When creating Item 19, it is considered best practice to:

  • Ensure there’s a logical foundation for the information being disclosed

  • Maintain written proof that supports the shared financial data

  • Provide comprehensive details clarifying the foundation of each Financial Performance Representation (FPR) to reduce potential deception or misinterpretation.


The disclosures within Item 19 must be straightforward and devoid of complex terminology so that prospective franchisees can easily understand them. Franchisors are encouraged to regularly scrutinize and refresh their financials in order to maintain the relevance and accuracy of Item 19. Seeking advice from experienced franchise lawyers can assist franchisors in presenting their financial figures in a manner that is both compelling and compliant with legal standards.


Ensuring Reasonable Basis and Written Substantiation



Ensuring that franchisors are protected from unfounded allegations and delivering precise financial data to individuals considering franchise opportunities is accomplished by establishing a dependable foundation for Financial Performance Representations (FPRs) backed by documented evidence. Such dependability stems from the kind of information on which a judicious entrepreneur would rely when contemplating an investment.

To corroborate the financial details presented in Item 19, it’s imperative for comprehensive documentation such as income statements, tax documents, and statements reflecting profits and losses to be kept accurately. This written substantiation should encompass meticulous Profit & Loss accounts that allow for verification by prospective franchisees.


Avoiding Misleading Information


To avoid imparting misleading information in Item 19, it is vital for franchisors to provide financial data that offers a balanced perspective. This includes presenting both median and average figures as well as the highest and lowest values.


For prospective franchisees to make decisions with confidence, franchisors must present their disclosures clearly, devoid of complex jargon or discrepancies. Establishing clear and transparent Financial Performance Representations (FPRs) fosters trustworthiness and credibility among potential partners.


Consultation with franchise attorneys is essential for the accurate and enticing disclosure of financial performance representations (FPRs). These legal professionals can offer valuable advice on how to disclose financial performance data that not only complies with regulations, but also attracts potential franchisees.


Franchise attorneys are equally instrumental in aiding franchisors to grasp the advantages and disadvantages of presenting financial performance representations within Item 19. Their expertise plays a crucial role in ensuring regulatory compliance while crafting an effective franchise offering.


Real-World Examples of Item 19 Disclosures

Examples like those from Varsity Zone AC and 360 Painting demonstrate the utility of item 19 disclosures by showing how in-depth financial data can be conveyed. Varsity Zone AC delivers a comprehensive view of its monthly income, reporting earnings from various franchise sites alongside revenue categorization based on services offered.

Meanwhile, 360 Painting shares annual gross income figures stemming from franchised as well as company-owned stores, complete with details regarding variable expenses and net profits. Such elaborate revelations assist prospective franchisees in gaining a clearer picture of the financial health of these franchises.

How to Interpret Item 19 Data

Evaluating Item 19 data necessitates the examination of past performance, future predictions, and relevant periods. It is essential for prospective franchisees to discern if the information disclosed pertains to historical achievements or is a prediction of impending financial results. Comprehending the time frames that underlie the crafting of Item 19 disclosures is fundamental in grasping the significance of these figures.

Seeking confirmation from current franchisees can yield Enlightenment regarding the fiscal health of the franchising system. Their experiences offer invaluable perspectives on its actual financial performance, supplementing what has been provided within Item 19’s disclosure.

Common Pitfalls and Red Flags in Item 19

Potential franchisees should be wary of irregularities, the tweaking of figures, and a lack or insufficiency in Financial Performance Representations (FPRs) when examining Item 19. Consistency between Item 19 and other sections of the Franchise Disclosure Document is crucial to prevent suspicion from both regulators and potential investors.

A careful examination of footnotes associated with financial performance tables is important for spotting any manipulation that may have occurred within the data. When FPRs are missing, it could suggest either disappointing financial results or an inadequate record of financial history.

The Role of State Regulatory Agencies in Enforcing Item 19 Compliance

State regulatory agencies are instrumental in enforcing compliance with Item 19 and maintaining strict adherence to standards by franchisors. These states often have bespoke franchise disclosure laws that could necessitate extra disclosures from franchisors.

These state regulatory agencies hold the authority to address non-compliance concerning financial performance representations within Item 19’s disclosure requirements, thus protecting those considering becoming franchisees. It is mandatory for franchisors to notify these appropriate state regulatory authorities of any unsanctioned financial performance claims.

Connecting with Existing Franchisees

Creating a network among current franchisees provides invaluable understanding of the actual financial success and the day-to-day operations within the franchise system. This web of entrepreneurs acts as a support group, exchanging experiences and advice that can benefit your business.

Fostering ties with fellow franchisees may result in:

  • The formation of new partnerships and openings for commercial ventures.

  • Assistance in overcoming obstacles to achieve success.

  • Joint efforts to address intricate issues and develop innovative resolutions.


Summary

In the blog post, the criticality of comprehending Item 19 in making savvy franchise investments is highlighted. It underscores that a thorough grasp of financial performance representations provides invaluable insights into a franchise’s economic health. To make educated decisions about franchising opportunities, mastering an interpretation of Item 19 is essential. The piece concludes by stressing that honesty and precision in financial performance disclosures are not only pivotal for informed decision-making, but also emblematic of a trustworthy franchisor committed to transparency.


Frequently Asked Questions


What is the importance of Item 19 in the FDD?

The disclosures found in Item 19 of the Franchise Disclosure Document (FDD) are vital as they contain essential financial performance representations that assist prospective franchisees in determining the fiscal health and potential profitability of a franchise. This information is an invaluable asset when evaluating the prospects for success within a franchising opportunity.


What types of data are included in Item 19 disclosures?

Disclosures in item 19 may encompass past financial performance data, projected financial results, and additional supplemental financial information. These elements are critical when assessing the potential of a franchise opportunity.


How can prospective franchisees use Item 19 data?

Prospective franchisees have the ability to examine a franchise’s financial health, estimate potential returns on investment, and make educated choices by leveraging data from Item 19.


What are the legal requirements for Item 19 disclosures?

Disclosures for Item 19 must adhere to the regulations set forth by the FTC Rule, follow guidelines from NASAA, and meet any extra state regulatory demands to present financial representations that are both precise and substantiated.

It is imperative always to maintain compliance with these established standards.


Why is it important to connect with existing franchisees?

Engaging with current franchisees is crucial as it provides an opportunity to acquire critical knowledge regarding the financial performance, daily operations, and the supportive framework inherent in the franchise system.

By doing so, you are empowered to make well-informed choices prior to committing yourself to a particular franchise.


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Here are some of the franchises with strong Item 19s we think are worth your consideration. Click here to learn more.

Varsity Zone AC franchise item 19

varsity roofing franchise item 19

360 Painting franchise item 19

DRYmedic Restoration Services franchise item 19

Footprint Floors franchise item 19

Gameday Men's Health franchise item 19

Garage Force franchise item 19

GoGLOW franchise item 19

HealthyYou Vending franchise item 19

Home Helpers Home Care franchise item 19

Homewatch Caregivers franchise item 19

Joshua Tree Experts

Maid Right franchise item 19

Metal Supermarkets franchise item 19

MosquitoNix franchise item 19

Naturals 2 Go franchise item 19

One HourHeating & Air Conditioning franchise item 19

Pink's Window Services franchise item 19

Property Management Inc franchise item 19

Soccer Starts franchise item 19

Stand Strong Fencing franchise item 19

Temporary Wall Systems franchise item 19

That 1 Painter franchise item 19

Top Rail Fence franchise item 19

Up Closets franchise item 19

Voda Cleaning and Restoration franchise item 19

Zoom Drain franchise item 19

1-800-Plumber + Air franchise item 19

AAMCO franchise item 19

Anchored Tiny Homes franchise item 19

Best Choice Roofing franchise item 19

Cabinet IQ franchise item 19

Gatsby Glass franchise item 19

Home Helpers Home Care franchise item 19

Homewell franchise item 19

Koala Insulation franchise item 19

Pink's Windows Service franchise item 19

Rolling Suds franchise item 19

Schooley Mitchell franchise item 19

Spray Foam Genie franchise item 19

Stand Strong Fencing franchise item 19

Temporary Wall Systems franchise item 19

Tippi Toes franchise item 19

Voda Cleaning franchise item 19

ComForCare franchise item 19

Heroes Lawn Care franchise item 19

Home Helpers Home Care franchise item 19

HomeVestors franchise item 19

Junk King franchise item 19

Mighty Dog Roofing franchise item 19

Mister Sparky franchise item 19

Mr Rooter franchise item 19

Pink's Window Service franchise item 19

ProLift Garage Doors franchise item 19

PuroClean franchise item 19

QC Kinetix franchise item 19

Right at Home franchise item 19

Senior Helpers franchise item 19

Shrunk 3D franchise item 19

Spray Foam Genie franchise item 19

Stand Strong Fence franchise item 19

Temporary Wall Sytems franchise item 19

That 1 Painter franchise item 19

The Cleaning Authority franchise item 19

Up Closets franchise item 19

Voda Cleaning franchise item 19

Window Genie franchise item 19

WOW 1 Day Painting franchise item 19

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