Part 2: What is Item 19? Everything You Need to Know About This Franchise Disclosure Document Section
October 15, 2018
In the last section, we learned what is item 19 and why the Item 19 is a very important part of the Franchise Disclosure Document (FDD) despite being optional to include. As a prospective franchisee, you want to know how much you can make with a franchise under a certain brand, and Item 19 can answer just that. There are a lot of reasons why a brand may choose to not include their Item 19, but it is up to the franchisee to know and research what a good franchise is and how much money they can earn with a franchise. Here is what a strong Item 19 looks like and why you should invest in a franchise who has one.
What Does a Strong Item 19 Look Like?
Most franchisors who include data in Item 19 will show some breakdown of top line revenue numbers. Some will show bottom line profitability and some will show complete P&L data for some or all locations. In many cases, the amount of information a franchisor shares is limited by the amount of information they collect from their franchisees.
For example, U.S. Lawns shows, among other data points in their 2018 Item 19, that of the 205 franchised territories that were operating for the entire calendar year or 2017 the average produced gross sales of $726,503. That information is broken down further to show highs, lows, medians and performance by quartile. A similar break down is shown for gross profits where those same 205 franchised territories averaged $226,609 in the same period. This information provides a great place for candidates to start in building their own financial model.
In most cases, some information is better than none, but beware of franchisors who mask performance data by excluding a large number of units from their calculations. A striking example of this is an unnamed brand with more than 1,000 units who only shares financial information for 12 company owned units that significantly outperform their franchised units.
In any case, it is important to note that the data shared in Item 19 is just the beginning when it comes to understanding the potential financial performance of a franchise. Use the information provided to guide your conversations with existing franchisees. This will help you develop the most accurate picture of financial performance.
Why Prospective Franchisees Should Choose a Brand with an Item 19
Now that you know what Item 19 is and why brands may leave it out of the FDD, you may be thinking that a brand without one could prove to not be a worthwhile investment. There are many brands out there that are proud of their financial performance representations and feel that honesty and transparency between franchisor and franchisee are important.
At U.S. Lawns, we recognize the direct correlation between the success of franchisees and the success of a brand, which is why we include Item 19 in our franchise disclosure document. A relationship between a franchisor and franchisee based on trust and transparency leads to better communication and less surprises, and we believe that including Item 19 in the FDD is a first step in the right direction.
For more information to answer the question “What is Item 19 of the franchise disclosure document?”, contact us today.