Item 19 of the Franchise Disclosure Document (FDD) discloses information about the financial performance of the franchised or company-owned outlets. This section, known as the “Financial Performance Representation” (FPR), provides data—if the franchisor chooses to include it—on revenues, profits, or other financial results to help franchisees evaluate potential earnings.
In franchising, Item 19—titled “Financial Performance Representations”—is one of the most important and closely examined sections of the FDD. It allows franchisors to share financial information about existing or historical operations, such as average gross sales, cost of goods, or net profits. However, providing an Item 19 disclosure is optional under the Federal Trade Commission (FTC) Franchise Rule. If the franchisor chooses not to make an earnings claim, the FDD must include a specific statement that no financial performance representation is made. When included, Item 19 must be based on factual, verifiable data, clearly identifying the sources, time periods, and sample sizes used. For franchisees, this section offers valuable insight into the franchise’s earning potential and overall business performance.
Item 19 originated under the Uniform Franchise Offering Circular (UFOC) and became one of the most scrutinized disclosures under the FTC’s 2008 Franchise Rule revision. Historically, many franchisors made informal “earnings claims” through salespeople or marketing materials without factual backing, leading to misleading representations and investor losses. The FTC created Item 19 to ensure that any financial performance information provided is consistent, transparent, and supported by data. Today, franchisors that include a compliant Item 19 are often viewed as more transparent and credible, while those that omit it leave franchisees to conduct independent financial due diligence through current or former franchisees.
Also See: The Educated Franchisee, 3rd Edition
Under the FTC Franchise Rule (16 C.F.R. Part 436.5(s)), Item 19 requires franchisors to disclose detailed and substantiated financial performance data if they choose to provide it. The disclosure must include:
From a legal perspective, Item 19 protects both franchisors and franchisees: franchisors avoid liability for unsubstantiated claims, and franchisees gain access to factual financial information to make informed investment decisions.
| Type of Data | Description | Purpose |
|---|---|---|
| Gross Sales | Total annual or average revenue generated by franchise units. | Helps assess overall system performance. |
| Cost of Goods Sold (COGS) | Average cost of inventory or supplies used to generate sales. | Used to evaluate gross profit margins. |
| Operating Expenses | Typical costs for labor, rent, marketing, and utilities. | Shows potential overhead costs. |
| EBITDA or Net Profit | Earnings before interest, taxes, depreciation, and amortization (or net income). | Gives insight into franchise profitability. |
| Break-Even Analysis | Time or sales volume needed to cover all operating expenses. | Helps estimate when profitability may begin. |
| Median or Average Performance | Statistical data showing central performance measures of existing outlets. | Provides realistic expectations for new franchisees. |
| Issue | Best Practice |
|---|---|
| Unverified Data | Base all financial representations on actual, verifiable records audited or reviewed by accountants. |
| Selective Reporting | Disclose how many outlets were included in the data and why any were excluded. |
| Misleading Averages | Provide median values or ranges to avoid overstating results. |
| Improper Assumptions | Clearly explain all assumptions, such as geographic, demographic, or seasonal factors. |
| Omitting Material Facts | Include all relevant information that could affect performance interpretations. |
'Item 19 of the FDD includes a Financial Performance Representation showing that franchised locations averaged $875,000 in gross annual sales.'
'The franchisor did not include any earnings data in Item 19, meaning no financial performance representation is made.'
'Prospective investors should review Item 19 carefully and consult current franchisees to validate potential earnings and costs.'
Item 19 of the Franchise Disclosure Document (FDD) provides financial performance information about existing or company-owned outlets when offered by the franchisor. Whether detailed or omitted, this section is vital for helping prospective franchisees evaluate revenue potential, understand risk, and make informed investment decisions within the franchise system.
