Demystifying Item 19: What Franchisees Need to Know About Financial Performance Representations

Item 19 of the disclosure document serves as a crucial view of prospective franchisees’ potential financial future. However, it’s often misunderstood by franchisees and neglected by franchisors.

So, whether you’re a franchisor looking to scale, evaluating your first franchise opportunity, or expanding your portfolio, understanding how to interpret Item 19 is crucial. It can mean the difference between making an informed investment decision and relying on incomplete or misleading data. 

That’s why we’ve compiled the ultimate guide to help you understand. Here, we’ll break down the complexities of Item 19 and equip you with the knowledge to analyze these crucial financial disclosures confidently.

What is Item 19? 

First, and foremost, Item 19 is found in the Franchise Disclosure Document, which is a legal document that franchisors are required by the Federal Trade Commission (FTC) to provide to prospective franchisees. Item 19 specifically represents the Financial Performance Representation (FPR) section. 

This is where franchisors share historical or projected financial data about their franchise system’s performance. While franchisors aren’t legally required to include an FPR in their FDD, its presence often signals a commitment to transparency and can provide invaluable insights for potential franchisees. 

For franchisees, a detailed Item 19 can significantly reduce the guesswork involved in assessing a franchise’s potential financial viability. However, keeping up with the number also helps give franchisors an accurate representation of the financial health of their business. Item 19 often includes crucial metrics such as: 

1. Gross sales
2. Operating costs
3. Profit margins
4. Unit economics from existing franchised locations

It’s also important to note that approximately only 60% of franchisors actually choose to make these voluntary disclosures. Therefore, it gives those who do a distinguishing factor when evaluating different franchise opportunities. 

Item 19 Advantages for Franchisees 

Understanding your potential financial success is essential if you’re considering several franchises in your hunt to become a franchisee. That’s where item 19 comes in. This is a valuable tool for painting your franchise’s future financial picture. The abovementioned metrics help prospective franchisees gauge realistic revenue expectations and understand potential profitability in their target market.

However, it’s essential to view Item 19 as just one piece of a larger due diligence puzzle. While these financial representations provide valuable historical data, they shouldn’t be your sole decision-making factor. Savvy investors complement Item 19 analysis with additional research, including conversations with current franchisees, thorough market analysis, and consultation with financial advisors to understand the investment opportunity fully. 

Of course, it’s also important to remember that past performance data, while informative, doesn’t guarantee future results in your specific market or under your management. Ultimately, it will be up to you to ensure your franchise succeeds. Item 19 simply gives you a POV on how others are doing. 

Best Practices for Analyzing Item 19’s 

Before you go, we’ll leave you with the top tips and practices for analyzing Item 19 data. 

• Look beyond averages: Examine high/low ranges and median figures rather than just averages. Note what percentage of units fall into different performance brackets to understand the full spectrum of possibilities.
• Check geographic relevance: Focus on data from markets similar to where you plan to operate. Performance can vary significantly between urban, suburban, and rural locations.
• Review data categories: Pay attention to how data is segmented (by years in operation, store size, location type). Look for the category that best matches your planned franchise.
• Understand the fine print: Know exactly what’s included in the numbers. Are they showing just gross sales, or detailed cost breakdowns? Is the data from corporate or franchised units?
• Study trends: If possible, compare with previous years’ Item 19s to spot performance patterns and system stability.
• Verify with franchisees: Use Item 19 data as talking points when interviewing current franchisees. Ask if their real-world experience aligns with the disclosed figures.
• Note exclusions: Check what data might be left out (like underperforming units or new locations) as this could affect the overall picture.

The Final Word: Franchise Financial Health with T2B

Put simply – franchises are unique. So are the systems that should be implemented to track crucial financial measures, like those included in Item 19. Item 19 is the pulse of any franchise’s future, and every franchisor should consider improving its collection of financials from individual locations when seeking to scale. 

Need a specialized franchise accounting firm to help? Look no further than Top 2 Bottom, aka T2B. Our team offers franchise-specific bookkeeping and payroll to ensure the overall success of one or multiple locations. 

From consulting on processes to supporting item 19 and franchise disclosure documents, our expert team is here to help you navigate franchise success. Learn more or schedule a complimentary consultation to get started.