How To Make Sense of Item 19 in an FDD

For prospective franchisees researching the brand of their dreams, the Franchise Disclosure Document (FDD) is a key component in the decision-making process and Item 19 is perhaps the most influential piece of that puzzle. Item 19 answers the all-important question for investors: How much money can I make?

But beware, some franchisors may make generous earnings projections based on a small sample size in a single market, while others may not make projections at all. Here’s how to make sense of this critical information. 

What Is Item 19?

Item 19 is the section of the FDD known as the “Earnings Claim” or “Financial Performance Representations.” It’s the section that addresses return on investment, so for many investors, it represents the bottom line. 

For franchisors, this section is tricky. While not mandatory to even include, Item 19 showcases just how profitable a franchise owner can expect to be. And because there’s no standard for how this section should read or what it should look like, the information listed can vary from brand to brand. 

To Include or Not To Include?

Brands that do choose to include finances in Item 19 offer prospective franchisees a certain level of transparency other brands might not.

But just because a brand chooses not to include financial information in this section doesn’t necessarily mean it’s untrustworthy; there are a number of reasons this could be the case. Perhaps the brand is a newer franchise without enough data to confidently project into the future, or maybe it just doesn’t think its numbers would translate to other markets.

“If you can’t stand behind your numbers, then you shouldn’t put them in, but it’s not necessarily a red flag just because they’re not there,” said Kay Ainsley, managing director of MSA Worldwide, a franchise advisory group. “The franchisor may be just starting to franchise. Or, they may only have locations in one market and don’t want to mislead people. It may not be that the numbers are bad. It could be just the opposite. It may be that they’re really strong in that one market and the franchisor doesn’t want to set unrealistic expectations.”

What To Look For

Remember that no two Item 19s look alike, so comparing a few won’t necessarily make one brand more appealing than another. What you should look for is the bottom line: a breakdown of top-line revenue, profitability and profit and loss data per location. This information can help you understand what you can expect your business to earn if all goes according to plan.

From there, continue to vet that data. Is the statement including numbers from every location, or are some data points missing? Has the franchisor cherry-picked a couple of corporate-owned locations to show off or are you really getting a representative sample? 

“Is the data an average of all locations? If so, are they all in New York City or in South Dakota? Are they in markets that are similar to the one you’d like to open a franchise in? These are important questions to ask when reading through Item 19. Franchisors aren’t trying to mislead people, but the data can be confusing. Because of that, prospective franchisees need to know what to look for,” said Ainsley.

Some brands are proud of their financials and eager to offer potential partners their projections, while others are a little more protective. But just as they are, you should be protective of your finances and make a decision that makes you feel safe and comfortable with who you’re investing your money in.