The Item 19: How to Get to the Bottom Line When Researching Franchise Concepts

Located towards the bottom of a Franchise Disclosure Document (FDD), Item 19 is one of the most important pieces of information within the 200-something pages that franchise candidates receive from brands during the research and vetting process. While all of the figures listed in an FDD should be clearly read and understood, Item 19 is a critical part of the puzzle when a potential franchisee is trying to calculate their profit potential. 

Referred to as the franchise performance representation, Item 19 shows candidates what their earnings could possibly look like as an owner with the brand. These numbers are an important part of the equation and need to be carefully considered.

Look At Gross Profit Figures

It’s important to make sure that you understand what each figure in Item 19 represents and to frame it with perspective. Typically, there will be a number listed for gross sales and gross profit; the latter will end up being how much the owner will net after the cost of goods and services is subtracted. 

“I think the most important, and probably the most overlooked, is the gross profit. That's the revenue minus what it costs to actually produce it and keep the lights on. It gives you a good idea of what the take-home amount will ultimately be,” explained Keven Elwood, chief development officer at Premium Service Brands.

Don’t Accept It as Guaranteed

One misconception shared by some franchise candidates is that the numbers stated on the FDD’s Item 19 are a guaranteed fact. These financial performance representations are averages of what existing units have achieved and should be a ballpark estimate for what a new owner entering the system can procure if they follow the model correctly.  

“There's no guarantee that you'll achieve those, but it does give you an idea,” explained Steve Beagelman, founder of SMB Franchise Advisors*. “It will show you if it’s able to be enough of a revenue-generator for what you’re looking for.”

For this reason, it is vital candidates aren’t overzealous when looking at what Elwood calls the “big shiny revenue numbers.” Some brands report the lowest, median and highest revenues, which allows for a more comprehensive picture of what ownership looks like, while others just display the very best-performing units. 

“An Item 19 is a great place to start, but thinking of those numbers as a guarantee is a mistake,” explained Bryan Lewis, founder and owner of Press Waffle Co. “At the end of the day, the success of an individual franchise location is going to come down to the owner and the work that they put in.”

Beware of Missing Item 19s

Franchises are not required by law to include their franchise performance representation in their FDD, but most companies do so to offer full transparency. Displaying revenue numbers for a system that is profitable is an easy way to further market itself as a great opportunity for return on investment.

There are explainable reasons why some brands do not have a fleshed-out Item 19. New and emerging concepts often don’t have enough data readily available to include. It takes a least one full year of a franchise location operating before gross sales and profits can be reported. 

But if a company that is well-established and has been around for a significant period of time does not include numbers in their Item 19, “that can definitely be a red flag,” Elwood noted. It could be a sign that revenue isn’t great, that it’s been declining or a number of units have been closing.