How to Read an Item 19

There’s no doubt that a potential franchisee should read a Franchise Disclosure Document thoroughly. When it comes to learning more about the earning potential with the franchise brand, make sure to pay special attention to Item 19, which is referred to as the franchise performance representation. This section is the best way to gauge the revenue results from the previous year in the franchise system.

 

To really understand the FDD, including the Item 19, Sean Fitzgerald, Chief Development Strategist with No Limit Agency* and CFE, suggests reviewing this section with a franchise advisor.

 

“When it comes to an Item 19, you will need someone who understands the franchising industry to help you ask the right questions,” said Fitzgerald. “An advisor will be a great resource to let you know what to look out for and what questions to ask the franchisor.”

 

Fitzgerald stresses that all Item 19s are not created equal when it comes to reporting.

 

“The most important thing to take into consideration is that there is no standard for what a franchisor puts in the Item 19,” said Fitzgerald. "That is as long as the franchise company can substantiate the numbers.”

 

What that means for future franchisees is that there isn’t an always-easy way to compare two FDDs against each other, because they can all be pulling the numbers differently. For example, some companies may report on all store revenue while other brands may only show how corporate stores are performing in the section.

 

Fitzgerald says that not understanding that all brands may report differently is one of the biggest misunderstandings when it comes to reviewing an Item 19.

 

To get a better picture of how the revenue is reported, pay extra attention to the footnotes. This is where the brand has to disclose where it came up with the numbers, and what the size of the reporting sample is from the report.

 

According to Fitzgerald, another thing to keep in mind when reviewing an Item 19 is that the Federal Trade Commission requires that if the franchisors list any performance numbers they must also show the number of actual units that have experienced those numbers compared to the entire sample size. These numbers are important because it helps potential franchisees reviewing the system averages to see the ratio for how many units hit or exceed the averages. If only a small percentage is hitting the numbers, then the top producers are skewing the averages and this should be brought up with the franchisor or franchisees to get the system medium, which will hive you a better picture.

 

“Make sure to ask franchisees during validation where they fall in line with the Item 19,” said Fitzgerald. “You can ask where they are and why they are hitting the numbers or not.”

 

Understanding the revenue of a business is important for knowing if the franchise is the best fit for you and your future. Be sure to set aside the time to thoroughly review the Item 19 to help get a full financial picture of the brand.