Item 19 of the Franchise Disclosure Document (FDD) requires franchisors to disclose information about the financial performance of their franchises. This information can be crucial for potential franchisees who are considering investing in a particular franchise. However, there are certain requirements that franchisors must follow in order to create a compliant Item 19 earnings claim. In this blog post, we’ll discuss how to create an Item 19 earnings claim for your franchise.
1. Understand the franchise legal requirements
The first step in creating an Item 19 earnings claim is to understand the requirements set forth by the Federal Trade Commission (FTC). The FTC requires that franchisors provide a “clear and conspicuous” disclosure of the financial performance of their franchises. This means that the disclosure should be easy to understand and prominently displayed in the FDD.
In addition, the FTC requires that franchisors base their earnings claims on actual data from their franchise system. Franchisors are not allowed to make speculative or hypothetical earnings claims. Franchisors must also disclose any material facts that may affect the financial performance of their franchises.
2. Gather the data needed to build your Item 19
Once you understand the requirements, the next step is to gather the data for your earnings claim. You will need to collect financial information from your franchisees, such as revenue, expenses, and profits. You may also want to collect information about the number of customers, the average sale price, and other relevant metrics.
It’s important to collect data from a representative sample of your franchisees. You should avoid cherry-picking data from your top-performing franchisees or excluding data from underperforming franchisees. This could give potential franchisees a misleading impression of the financial performance of your franchise.
3. Calculate the numbers with accuracy based on your actual financial data
Once you have gathered the data, you can begin to calculate the numbers for your earnings claim. You may want to hire an accountant or financial analyst to help you with this process. It’s important to ensure that your calculations are accurate and based on sound financial principles.
You may want to present your data in a variety of formats, such as charts, graphs, or tables. This can help potential franchisees understand the data more easily and make comparisons between different franchises.
4. Draft the Item 19 franchise disclosure
The next step is to draft the disclosure for your Item 19 earnings claim. This should be a clear and concise summary of the financial performance of your franchise system. You should avoid using overly technical language or jargon that could confuse potential franchisees.
Your disclosure should include the following information:
- The number and percentage of franchisees that achieved the financial results presented in the disclosure
- The time period for which the financial results are presented
- The range of revenues, expenses, and profits for the franchisees included in the disclosure
- Any material factors that may affect the financial performance of your franchise
It’s important to review your disclosure carefully to ensure that it complies with the requirements set forth by the FTC.
In conclusion, creating an Item 19 earnings claim can be a complex process. However, by following the steps outlined above and working with experienced professionals, you can create a compliant and effective earnings claim that provides valuable information to potential franchisees. Remember to always be transparent and truthful in your disclosures, and avoid making unrealistic or misleading claims about the financial performance of your franchise.
For more information on the FDD or Item 19, contact us.
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