Part 1: What is Item 19? Everything You Need to Know About This Franchise Disclosure Document Section
October 08, 2018
The franchise disclosure document (FDD) is the most important document that stands between franchisees and their new opportunity. Entrepreneur Magazine explains that the FDD includes 23 standardized sections to break down all associated costs, obligations, restrictions, regulations, and benefits that come with the investment in a specific franchise. The FDD, which is required by the Federal Trade Commission (FTC) is designed to make it easier for candidates to compare one franchise opportunity against others. Item 19, however, does not seem to fit this mold as it is the only item that franchisors have the option whether or not to disclose. Additionally, franchisors are given a lot of leeway as far as what or how they disclose the information in Item 19 making it difficult to compare one against another.
You are probably wondering, “What is Item 19?”, “What does a strong Item 19 look like?” and “Why would franchisors choose to exclude it?” Let’s see if we can answer these questions.
What is Item 19?
All Business Magazine defines Item 19 as a section of the FDD that displays what is called “Earnings Claims” or “Financial Performance Representations.” Many franchisors fear it because it answers the biggest question potential franchisees have: “How much money can I make with this franchise?” This is the section where franchisors can show off exactly how profitable, or unprofitable, their franchise could potentially be. However, because there is no standard format prescribed by the FTC for Item 19, the information contained within can vary significantly from brand to brand. This doesn’t mean you can’t trust the information found in Item 19 as franchisors are required to have substantiated data behind any claims made within and are not allowed to provide any other information regarding earnings outside of Item 19.
Brands who include Item 19 are showing some level transparency between them and their new franchisee by providing this information; however, not every brand is as transparent as they could be or has a financial performance representation they feel will be beneficial if they show it to prospects. That brings us to the next question.
Why Do Some Brands Leave Out Item 19
There are many reasons why a brand may choose to not include Item 19 on their FDD: they could be a newer franchise, they may be in a unique industry that is not super profitable or well-known yet, or they may just be falling behind the competition.
Regardless of the reason, the lack of having Item 19 in the FDD could portray that the brand has something to hide from knowledgeable franchise candidates. This lack of transparency can create distrust between the brand and the prospective franchisee and can ultimately cost the sale. Knowing what the Item 19 is and why it is important prior to investing in a franchise can save franchisees from investing in a brand that may not bring them the success they want or expected.
Find out what a strong Item 19 looks like and why you should choose a brand who has one in their FDD in the second part of this article.