FDD Item 19 Explained: How to Read Franchise Earnings Claims (and What to Do If There Are None)

Is a franchisor required to disclose earnings in Item 19?

No. Under the FTC Franchise Rule, a financial performance representation (FPR) is optional. But it is all or nothing in one sense: if the franchisor or anyone selling for it gives you any information from which you could estimate sales, income or profit, that information must be in Item 19 and meet the Rule's requirements. Under 16 CFR 436.9, making an FPR without a reasonable basis and written substantiation, or one that is not in Item 19, is prohibited.

If the franchisor makes no FPR, Item 19 must include a required statement saying that it does not make any representations about a franchisee's future financial performance or past performance, and that it does not authorize its employees or representatives to make any, either orally or in writing. The statement also tells you to report any other financial performance information you receive to franchisor management, the FTC and the appropriate state agencies.

What must an Item 19 earnings claim include?

When a franchisor does make an FPR, 16 CFR 436.5(s) requires it to state whether the figures are historic (actual results of existing outlets) or a forecast, and to disclose the material bases and assumptions. For historic figures about a subset of outlets, it must disclose:

• which characteristics the included outlets share, such as location type, length of operation, or franchised versus company-owned;
• the dates the results were achieved;
• the total number of outlets in the period, and how many had the stated characteristics;
• how many outlets' data were actually used;
• the number and percentage of those outlets that attained or surpassed the stated result;
• any characteristics of the included outlets that may differ materially from yours;
• a clear and conspicuous admonition that your results may differ; and
• a statement that written substantiation is available on reasonable request.

What tricks make Item 19 figures look better than they are?

None of the following is necessarily unlawful if properly disclosed. They are reasons to read the footnotes before the headline.

• Averages instead of medians. A few very high-volume units pull the average up. If the average is $1.2 million and only 35% of units reached it, most owners did worse. Look for the median, or the percentage that hit the figure, which the Rule requires.
• A flattering subset. "Units open at least 24 months in our top two quartiles" can exclude every struggling outlet. Compare the number included with the total outlet count in Item 20.
• Closed units left out. Outlets that closed during the year often drop out of the data. If Item 20 shows 20 closures and Item 19 covers only units open for the full year, the worst results may be missing.
• Company-owned outlets mixed in. Corporate units may have better sites, no royalty and lower costs. Check whether the figures separate them.
• Gross sales, not profit. Many Item 19s disclose revenue only. Revenue says nothing about rent, labor, food or inventory costs, royalties or debt service.
• Partial cost data. Some disclose "store-level EBITDA" or "four-wall profit" that leaves out royalties, the brand fund, owner salary, rent or occupancy costs. Find out what is excluded.
• Old or unusual years. A strong year that is not repeated, or a single market, can be presented as typical.

How to read an Item 19 table: what it says vs what to ask

Use this table to translate common Item 19 presentations into questions for the franchisor and for the franchisees listed in Item 20.

How do you turn Item 19 into your own estimate?

Start with a sales figure that you can defend, not the headline. If the median franchised unit sold $800,000 and units in markets like yours sold less, use the lower number. Then subtract what the FDD and the franchise agreement say you must pay.

A worked example with illustrative figures: at $800,000 in gross sales, a 6% royalty is $48,000 and a 2% brand fund is $16,000. If cost of goods runs 30% ($240,000), labor 28% ($224,000) and rent with occupancy costs 9% ($72,000), you have $200,000 left before technology fees, insurance, utilities, repairs, local marketing, loan payments and your own salary. Those remaining costs can easily absorb most of that. Ask current franchisees what share of sales each cost actually takes in their units.

Run three versions: the median, a figure 20% below it, and your own conservative estimate for year one. If the business only works at the average, it does not work.

What if a salesperson gives you numbers that are not in Item 19?

Treat it as a warning sign. A spreadsheet of "typical owner earnings," a verbal "our owners clear about $150,000," or a pro forma prepared for you by a sales representative is a financial performance representation. If it is not in Item 19, the franchisor's own Item 19 statement says employees are not authorized to make it. Keep a copy or note of anything you are given, with the date and who gave it.

Watch the closing paperwork too. Some franchisors ask you to sign a questionnaire or acknowledgment confirming nobody made earnings claims. Under the NASAA Statement of Policy on franchise questionnaires and acknowledgments, which many registration states follow from 2023, those documents may not be used to make you disclaim reliance on statements made to you. Do not sign a statement that is untrue. If you were given figures, say so, and talk to a franchise attorney.

There are two narrow exceptions. A franchisor selling an existing outlet may give that outlet's actual records to its prospective buyer. And a franchisor that has an Item 19 may give a written supplemental FPR about a particular location or variation, as long as it meets the same substantiation rules and explains how it differs from Item 19.

What should you do if Item 19 is blank?

A missing Item 19 is lawful, and some well-known systems do not provide one. But it means you are building your estimate without the franchisor's data, so the burden shifts entirely to you.

It also changes how you should treat everything the sales team says. With no Item 19, the franchisor's own required statement says no employee or representative is authorised to tell you what units earn. If someone does anyway, that is both a compliance problem for the franchisor and a reason to be more sceptical, not less.

• Call franchisees listed in Item 20, at least 5 current and 2 former, and ask about sales, the biggest cost lines, time to break even and whether they would buy again.
• Read the brand's Item 21 financial statements: royalty income divided by the royalty rate gives a rough idea of total system sales, which you can divide by the number of franchised units in Item 20 for an average.
• Check older FDDs, which some state regulators publish, to see whether the brand ever had an Item 19 and dropped it.
• Have an accountant review your projections before you commit any money.

When should you get professional help?

If the Item 19 figures drive your decision, ask for the written substantiation and have an accountant look at it. If you received earnings figures outside Item 19, or were asked to sign an acknowledgment that contradicts what you were told, talk to a franchise attorney before you sign. An automated review of the FDD can flag a missing Item 19, compare the outlets in Item 19 with the counts in Item 20, and show fees at your own sales figure, so you go into those conversations with the right questions.