The 3 Most Common Misconceptions About Item 19

A prospective franchisee’s first time reading a Franchise Disclosure Document is often fraught with misconceptions and misunderstandings. The dense, 200-something page document is anything but an easy read and it only makes sense that there might be some missteps along the way. 

Item 19, while not mandatory to include, discloses earnings claims from existing franchise owners and corporate locations. Prospective franchisees would be wise to heed the advice of experts and avoid the common errors made when reading what is widely considered to be the most significant section in the FDD. This fine-print section can contain critically important information about the financial returns a franchise opportunity can realistically and reliably generate.

Below are three of the most popular misconceptions first-time readers make in regard to Item 19. 

“What is listed as the financial representation will be how much money I make.”

Item 19 is often the section that candidates flip to first when opening up their FDD, and not without good reason. All prospective candidates want to learn how much money they are going to make, plain and simple. Unfortunately, Item 19 isn’t quite so transparent. 

“The most common misconception that candidates have is that the FPR (financial performance representation) shown in a historical Item 19 will be a direct correlate to what they are able to achieve,” said Mark Seibert, founder of iFranchise Group. “A good candidate who wants to be properly informed needs to look at each and every line item and understand the degree to which those are achievable for them specifically.” 

For example, if a franchise concept offers different types of operating units, such as freestanding units or strip-center locations, prospects need to understand what kind of unit they are buying into and apply the appropriate subset. 

“Location also determines why one unit might do better financially,” said Seibert. “If a franchisor has 20 locations in Miami but the franchisee is opening in Orlando, there is less of brand presence, established supply chain and rent guarantee—all of which can affect the revenue side. All prospective franchisees should ask: Are these financial estimates representative of my specific circumstances?” 

“I will fall into the top-tier demographic of earners.”

“Everyone assumes they will outperform the average FPR,” said Seibert. “Remember, half the franchisees in the system believed they’d outperform everyone else too—but they didn’t.” 

All candidates should take a hard look at Item 19 representations and ask themselves how they would deal with ending up on the bottom tier of earners, what circumstances could bring them there and how they would withstand the blow financially. 

“Never look at Item 19 separate from Item 7 (estimated start-up costs),” said Rob Flanagan, CEO of pet services franchise Wag N’ Wash®. “Every franchisee coming into the system should look at Item 7 and compare it to Item 19 in order to calculate the possible amount, likelihood and timeline of their ROI. Keep in mind that profit is revenue minus the operating costs it takes to run the franchise in that given time period.”

It is also important to validate the experience with other franchise partners, as the contents of Item 19 are determined by the franchisor, who is likely to showcase the brand’s most positive results. Accurately assessing the entire financial picture requires prospective franchisees to discuss where previous franchisees fell on the proposed spectrum of earnings. 

“The footnotes are not important or necessary to read.” 

Wrong. Item 19 is one of those cases in which there can be more information in the footnotes than anywhere else. That “total sales” number may look appealing, but there is often much more to the figure than meets the eye.

“Look at the notes carefully,” said Kay Ainsley, Managing Director of MSA Worldwide, a franchise advisory group. “What kind of information is being provided? How does that information relate to where your location would be? Franchisors should try to provide the most realistic information they can, and footnotes can help explain things like where the units referenced are located. That can mean a lot in some industries, like restaurants, for example.”

While Item 19 is often displayed in graph form, the footnotes are where candidates find some of the information discussed earlier—whether the unit is freestanding or inline, the total square footage of the site, and more. The footnotes will provide information on whether or not the average unit volumes (AUVs) of the listed locations are corporate-owned or franchised. Since sales expectations can vary wildly from location to location in those scenarios, the footnotes are not to be ignored.

Of course, potential franchisees should consider the entire FDD (and not just item 19) when evaluating a franchise opportunity. Avoiding these rookie mistakes gives prospective franchisees a better chance of accurately assessing an FDD to learn whether the franchise opportunity they’re exploring will result in a lucrative long-term relationship with the franchisor.