FDD Item 19: Understanding Financial Performance Representations

Item 19 of the Franchise Disclosure Document addresses Financial Performance Representations, sometimes referred to as "earnings claims." It is one of the most scrutinized sections of the FDD by both prospective franchisees and regulators. This article provides general educational information about Item 19. It is not legal advice.

What Is Item 19?

Item 19 is the section of the FDD where a franchisor may choose to provide historical or projected financial performance data to prospective franchisees. The FTC Franchise Rule does not require franchisors to include a financial performance representation. However, if a franchisor chooses to provide one, it must have a reasonable basis and comply with specific disclosure requirements.

Why Item 19 Matters to Franchise Buyers

For prospective franchisees, Item 19 can be a valuable tool for evaluating the potential return on investment. However, buyers should understand that:

• Not all franchisors include a financial performance representation.
• The data provided may reflect only a subset of units (for example, only the top-performing locations).
• Historical performance does not guarantee future results.
• The representation may not account for differences in geography, market conditions, or operator experience.

Why Item 19 Matters to Franchisors

For franchisors, Item 19 is a powerful marketing tool that can help attract qualified buyers. However, it also carries legal risk. If the representation lacks a reasonable basis, omits material information, or is presented in a misleading way, the franchisor may face regulatory action or litigation.

Franchisors should work with experienced franchise counsel to ensure that any Item 19 representation is supported by adequate data, properly disclaimed, and compliant with both federal and state requirements.

Types of Financial Performance Representations

Common types of Item 19 representations include:

• Gross revenue averages: Average gross sales across all units or a subset of units.
• Range of performance: A range showing low, median, and high performers.
• Cost breakdowns: Information about operating costs or profit margins (less common).
• Company-owned unit data: Performance data from franchisor-operated locations, which may not reflect franchisee performance.

What a Buyer Should Ask About Item 19

• Does the representation reflect all units or only a subset?
• What time period does the data cover?
• Are the units in comparable markets to the one I am considering?
• Does the data include company-owned units, franchised units, or both?
• What assumptions or disclaimers accompany the representation?

Reviewing Item 19 with legal counsel can help a buyer understand what the data does and does not say, and how it fits into the broader evaluation of the franchise opportunity. If you are a franchisor considering an Item 19 disclosure, consult with an FDD drafting attorney to ensure compliance. If you are a buyer, have an attorney review the FDD before signing.

This article is for general informational purposes only and does not constitute legal advice. Financial performance representations are highly regulated. Consult a licensed franchise attorney before including or relying on an Item 19 representation.