This month, I want to take a moment to talk about the Franchise Disclosure Document (FDD), specifically Item 19. A lot of people I talk to assume that Item 19 will tell them everything they need to know about whether a franchise is profitable. Unfortunately, that’s almost never the case.
Let’s break it down. There are four types of Item 19 disclosures you might come across:
- The Missing Item 19 – Believe it or not, franchisors aren’t required to share earnings data, and about half of them don’t. If that’s the case, you’ll see two standard paragraphs in Item 19 stating that they could disclose financials but chose not to. On top of that, their employees are prohibited from discussing earnings with you. So, how do you figure out profitability? By talking directly to franchisees.
- The Partial Item 19 – Some franchisors will give you some financial data—maybe average gross sales or even a gross profit figure. But here’s the catch: they won’t share all the expenses or net profitability. Without those numbers, you can’t get a full picture of what you might actually earn. Again, the only way to truly understand the financials is by speaking with franchisees.
- The Company-Owned P&L – In this case, the franchisor provides a full profit and loss statement—but only for company-owned locations. While that might sound helpful, it can be misleading. A company-owned store might operate differently than a franchisee-run location. It could be a showcase store or a business the franchisor acquired rather than built from scratch using their own system. Useful? Yes. But not enough to base your decision on. You’ll still need to dig deeper by talking to franchisees.
- The Hypothetical P&L – This one lays out what profitability could look like at different sales levels. Sounds great, right? The problem is, it’s all based on projections and assumptions, not real-world data. These numbers might be optimistic, outdated, or just plain unrealistic. Once again, your best bet is to talk to franchisees who are actually running the business.
Here’s the bottom line: as much as we’d love to open up the FDD, flip to Item 19, and instantly know how much money we’ll make, it just doesn’t work that way. There are no shortcuts to due diligence. If you want an accurate picture of what you’re getting into, you have to put in the work—especially when it comes to building a realistic P&L. (for more detailed information - read The Educated Franchise)
So, as you explore your options, make it a priority to connect with franchisees. Ask the tough questions. Get a true sense of what’s possible. The better your research, the more confident you’ll be in your decision.
