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.

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.