26d • Franchise Development
Creating and Presenting an Effective Franchise Item 19 Financial Performance Representation
One of the most important sections of a Franchise Disclosure Document (FDD) is Item 19, commonly referred to as the Financial Performance Representation (FPR). For prospective franchisees, Item 19 is often the most anticipated section of the FDD because it provides financial information that can help them evaluate the potential economic performance of the franchise opportunity.
For franchisors, however, Item 19 represents one of the most heavily scrutinized and legally sensitive sections of the franchise offering. The Federal Trade Commission (FTC) and state franchise regulators require that any financial representations made to prospective franchisees be truthful, substantiated, and presented in a manner that is not misleading.
When prepared correctly, Item 19 becomes a powerful sales and development tool. It helps prospective franchisees understand the economics of the business, builds credibility for the franchise system, and provides transparency regarding expected performance. When prepared improperly, however, Item 19 can expose a franchisor to regulatory issues, legal liability, franchise disputes, and reputational damage.
The key is finding the balance between presenting compelling financial information and ensuring full legal compliance.
Understanding the Purpose of Item 19
Item 19 exists to provide prospective franchisees with objective financial information regarding the franchise system.
Contrary to what many new franchisors believe, Item 19 is not required. A franchisor may choose not to include any financial performance representation. In that case, the franchisor and its representatives are prohibited from making any earnings claims, revenue estimates, profit projections, or financial performance statements outside of the FDD.
However, most modern franchise systems choose to include Item 19 because prospective franchisees increasingly expect financial transparency during the evaluation process.
A professionally prepared Item 19 helps answer critical questions such as:
- What revenue levels are existing franchisees generating?
- How do top-performing locations compare to average locations?
- What are typical operating expenses?
- What profitability metrics are available?
- How long have the reported locations been operating?
A strong Item 19 provides factual information while allowing prospects to perform their own due diligence.
Start with Reliable Financial Data
The foundation of any Item 19 is reliable data.
The FTC requires that all financial representations be supported by written substantiation at the time the claim is made. This means a franchisor must possess documentation proving the accuracy of every financial figure included in Item 19.
Sources may include:
- Point-of-sale reports
- Accounting records
- Tax returns
- Profit and loss statements
- Royalty reports
- Audited financial statements
- Franchisee-submitted financial reports
The more organized and consistent the data collection process, the stronger and more defensible the Item 19 becomes.
Franchisors should avoid using anecdotal information, verbal estimates, or unsupported assumptions.
Every number should be traceable to documented business records.
Determine Which Metrics to Present
A common mistake among emerging franchise systems is attempting to present too much information.
The most effective Item 19 presentations focus on clear, understandable metrics.
Common financial metrics include:
Gross Revenue
This is the most frequently reported metric.
Revenue is generally easier to verify and less susceptible to variations caused by owner management styles.
Examples include:
- Average annual revenue
- Median annual revenue
- Highest revenue location
- Lowest revenue location
- Revenue by quartile
- Revenue by geographic region
Transaction Volume
Some franchise systems report:
- Number of customers served
- Average ticket size
- Service volume
- Membership counts
These metrics can help prospects understand operational drivers behind revenue performance.
Gross Profit
Some mature franchise systems provide gross margin information to demonstrate operational efficiency.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization can provide insight into business-level profitability.
Operating Expenses
Many franchisors include:
- Labor costs
- Occupancy expenses
- Marketing expenses
- Cost of goods sold
These figures help prospects better understand the economic structure of the business.
Use Actual Historical Performance
Item 19 should be based primarily on actual historical results.
The strongest financial performance representations rely on:
- Existing franchise units
- Company-owned locations
- Affiliate-owned operations
Historical operating data provides credibility and reduces regulatory risk.
Prospects generally trust actual operating performance more than hypothetical projections.
For emerging franchise systems with limited franchise history, company-owned location performance often serves as the foundation for Item 19 disclosures.
Segment Data Appropriately
Not all franchise locations perform similarly.
Professional Item 19 presentations often segment data based on meaningful characteristics.
Examples include:
By Location Age
- Less than 12 months
- 12-24 months
- More than 24 months
By Geography
- Northeast
- Southeast
- Midwest
- West Coast
By Size
- Small locations
- Standard locations
- Large locations
By Performance Tier
- Top 25%
- Middle 50%
- Bottom 25%
Segmentation helps prospects understand performance differences and creates a more accurate representation of the system.
Avoid Inflated Projections
One of the most dangerous mistakes a franchisor can make is presenting overly optimistic assumptions.
Item 19 should not be a marketing brochure.
It should be a factual disclosure document.
Statements such as:
- "You can easily earn six figures."
- "Most franchisees become millionaires."
- "You should achieve these results."
should never appear in Item 19.
Instead, the disclosure should state:
"Of the 35 franchised locations operating for the entire reporting period, average gross revenue was $825,000." It is important to note that you are required to also show a MEAN store sales volume if you show a average sales volume for your franchised stores.
This approach allows the numbers to speak for themselves.
Clearly Explain Methodology
A professional Item 19 always explains how data was collected and calculated.
Examples include:
- Reporting period dates
- Number of units included
- Excluded locations
- Definitions of revenue
- Definitions of expenses
- Data sources
Transparency builds credibility and demonstrates compliance.
The methodology section should be detailed enough that a prospect can understand exactly how the financial information was derived.
Include Appropriate Disclaimers
Every Item 19 should contain legal disclosures required by franchise regulations.
Common disclosures include:
"No assurance can be given that you will achieve the same results."
"You should not consider these figures as the actual or potential results that your franchise will achieve."
"Your individual results may differ."
These disclosures help ensure prospects understand that historical performance does not guarantee future outcomes.
Present Information Professionally
Presentation matters.
The best Item 19 sections are clear, organized, and easy to read.
Common formats include:
Tables
MetricAverageGross Revenue: $825,000
Cost of Goods: $265,000
Labor: $195,000
EBITDA $145,000
Quartile Analysis
GroupRevenueTop 25%: $1,250,000
Average $825,000
Bottom 25% $525,000
Visual Charts
Many franchise sales teams create separate sales presentations using charts and graphs based solely on Item 19 data already disclosed in the FDD.
Visual representation helps prospects understand the information more quickly while remaining compliant.
Train Franchise Sales Personnel
Even the best Item 19 can create risk if salespeople are improperly trained.
Franchise development representatives must understand:
- What can be discussed
- What cannot be discussed
- How to answer financial questions
- How to reference Item 19 appropriately
Many franchise disputes originate not from the FDD itself but from informal conversations that occur during the sales process.
Sales personnel should consistently direct prospects back to the disclosed Item 19 information rather than offering opinions or personal estimates.
Maintain Ongoing Documentation
Item 19 substantiation is not a one-time exercise.
Franchisors should maintain organized records supporting every disclosed figure.
This documentation should be updated annually during the FDD renewal process.
Best practices include:
- Monthly financial reporting
- Franchisee reporting requirements
- Revenue verification procedures
- Data retention policies
- Annual audits of reported figures
Strong documentation protects the franchisor while improving the quality of future disclosures.
Why a Strong Item 19 Matters
Today's franchise buyers are increasingly sophisticated. They expect transparency, data, and objective information before making an investment decision.
A professionally prepared Item 19 provides several advantages:
- Builds credibility
- Enhances franchise sales effectiveness
- Increases buyer confidence
- Reduces regulatory risk
- Creates transparency
- Supports informed decision-making
When supported by accurate financial records and presented within the legal framework established by the FTC Franchise Rule, Item 19 becomes one of the most powerful tools available to a franchisor.
The most successful franchise systems understand that Item 19 is not simply a compliance requirement—it is an opportunity to demonstrate the strength of the business model through factual, substantiated performance data. By focusing on accuracy, transparency, and proper presentation, franchisors can create a Financial Performance Representation that is both legally compliant and highly effective in helping prospective franchisees evaluate the opportunity.
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Creating and Presenting an Effective Franchise Item 19 Financial Performance Representation
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