How to Create an Item 19
The Item 19 is a section of the Franchise Disclosure Do unsent that presents historical financial data for company owned locations of the business being franchised. This section formerly referred to as an warning claim and now as a financial performance representation (FPR) is maybe the most discussed, most litigated and most important part of your franchise presentation. You do have the option to sell your franchise without an Item 19, which would look something like this;
FINANCIAL PERFORMANCE REPRESENTATIONS
The FTC’s Franchise Rule permits a franchisor to provide information about the actual or potential financial performance of its franchised and/or franchisor-owned outlets, if there is a reasonable basis for the information, and if the information is included in the disclosure document. Financial performance information that differs from that included in Item 19 may be given only if: (1) a franchisor provides the actual records of an existing outlet you are considering buying; or (2) a franchisor supplements the information provided in this Item 19, for example, by providing information about possible performance at a particular location or under particular circumstances.
Franchisebrand does not make any financial performance representations. We also do not authorize our employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, we may provide you with the actual records of that outlet. If you receive any other financial performance information or projections of your future income, you should report it to the franchisor’s management by contacting franchise brand owner at phone number, address and email, the Federal Trade Commission, and the appropriate state regulatory agencies.
This is perfectly ok and allowed for you to sell your franchise with this version of an Item 19. The problem with this approach is that you are not then able to discuss anything related to financial performance of the business. And I can tell you that every buyer will be asking the question “How much can I make?”
My advice, do an item 19, just do it correctly. There are lots of rules that surround how you present your item 19, so we always recommend getting qualified legal advice from a franchise lawyer before going to market with your FDD. But here are the basics, you should only present actual historical data that your business has generated. I would only use data from the most recent fiscal year (if it is 2022, only use as far back as 2021). If you have multiple locations, make sure to show all of your locations financial information, not just one or two. You may exclude certain locations if you have unique circumstances. For example, FMS works with a coffee brand that has 14 units, 3 of which are temporary units and operate seasonally, those were not included in the Item 19. Make sure that when you are building this, you have the ability to back up your numbers and prove where they came from, worst case, you’ll need to defend how you came up with your item 19 if it were ever challenged.
Next, if you do choose to go to market with an Item 19, be sure to only reference numbers that match up with what is in your item 19. Never indicate projections or a guarantee that the franchisee will achieve the same or better results, it is meant to be presented as fact-based data and only as a representation of what you did in your business.
For more information on the Item 19, contact FMS;
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