Item 19 Financial Performance Representations
Item 19 of the Franchise Disclosure Document addresses whether the franchisor is making any financial performance representations about the franchise opportunity. These disclosures, sometimes called “earnings claims,” describe past or projected financial results for company owned or franchised outlets.
For emerging franchisors, deciding whether and how to make an Item 19 disclosure is a strategic choice. For franchisees, Item 19 is often one of the most closely reviewed portions of the FDD because it directly influences expectations about sales and profitability.
Purpose of Item 19 in the FDD
The purpose of Item 19 is to provide a transparent, standardized framework for presenting financial performance information. Rather than relying on informal conversations or marketing promises, franchisors must present earnings information in a structured format with supporting assumptions and disclaimers.
A franchisor is not required to provide an Item 19 disclosure. However, if it makes any financial performance claims to prospects, those claims must be included in Item 19 and supported by written substantiation.
Types of Financial Performance Representations
Financial performance representations can take several forms, depending on the data a franchisor has available and the message it wants to communicate.
Historical Averages and Medians
Many franchisors disclose historical sales or revenue data based on existing outlets. These disclosures might provide:
- Average or median annual gross sales
- Ranges or quartiles of performance
- Breakouts by geography, tenure, or outlet type
Expense and EBITDA Data
Some franchisors go beyond top line sales and include limited expense information or estimated earnings before interest, taxes, depreciation, and amortization. These disclosures require careful framing and support to avoid being misleading.
Company Owned Outlet Results
Franchisors may use results from company owned locations, franchised outlets, or both. In each case, Item 19 must clearly explain which outlets are included and how they compare to the typical franchisee.
Projections and Pro Formas
Projections are more sensitive and must be based on reasonable, documented assumptions. Many franchisors prefer to limit Item 19 to historical data to reduce risk.
Key Legal Requirements for Item 19
When a franchisor elects to make a financial performance representation, it must:
- Describe the representation clearly in Item 19
- Explain the time period and outlets used to create the data set
- Disclose any material differences between featured outlets and the franchise being offered
- Include all important assumptions and limitations
- Maintain written substantiation for the data used
State franchise examiners in registration states may comment on or require revisions to Item 19, particularly if a presentation appears incomplete or potentially misleading.
Considerations for Emerging Franchisors
For new and emerging franchisors, Item 19 often raises several practical questions:
- Is there enough operating history to support a reliable representation?
- Should the disclosure be limited to gross sales, or include expenses?
- How should outliers, unusually strong or weak locations, be handled?
- What is the best way to frame the data to support responsible franchise sales?
A well drafted Item 19 can help qualified prospects understand realistic performance, while an overly aggressive or poorly supported representation can create compliance risk and future disputes.
How Franchisees Should Read Item 19
Prospective franchisees should review Item 19 with care and treat it as a starting point, not a guarantee. Key steps include:
- Studying the sample size and time period used
- Confirming whether results are based on franchised or company owned locations
- Reviewing how many outlets performed above or below the stated average
- Comparing the data to local market conditions and anticipated expenses
Franchisees should also speak directly with current and former franchisees listed in Item 20 to understand how their real world results compare to the Item 19 disclosures.
Relationship to Other FDD Items
Item 19 is closely connected to other parts of the Franchise Disclosure Document, including:
- Item 5 and Item 6: Required fees that affect profitability
- Item 7: Estimated initial investment, which drives capital needs
- Item 20: System growth, openings, closures, and transfers
Reviewing these Items together gives a more complete picture of the opportunity than reading Item 19 in isolation.
Legal Support for Item 19 Strategy and Review
Waldrop and Colvin advises both franchisors and franchisees on Financial Performance Representations.
For franchisors, we help design Item 19 disclosures that align with the brand’s growth strategy while remaining compliant and well supported. For franchisees, we explain what Item 19 does and does not say, and how it fits into the broader picture of the franchise investment.
Schedule a consultation to discuss Item 19 and your franchise goals
