The slide comes up near the end of the presentation. A clean bar chart, a confident number above it: average annual gross sales, $812,000. The room goes quiet in the good way. You start doing the math in your head: royalty off the top, some rent, and still a very nice living.
But here is the hard truth about that number. It is sales, not profit. It is an average, which a handful of big outlets can drag upward. And it may describe only the outlets the franchisor chose to count.
FDD Item 19 is the section of a Franchise Disclosure Document where a franchisor puts any claim about what its outlets sell or earn. The FTC’s Franchise Rule calls such a claim a financial performance representation. Outside two narrow exceptions, Item 19 is also the only place a franchisor may lawfully make one, which makes it the most important page in the document and the easiest one to misread.
The problem sharpens the moment you compare two franchises whose Item 19s measure different things. One reports median gross sales for outlets open two years. Another reports average revenue for its top third. The Franchise Decision Helper has you rebuild each opportunity from the same inputs instead: enter the investment, the royalty rate and the profit you project from your own costs, and it works out a return on investment and payback period for each, then scores the rest of the deal alongside them. To try the method first, the free Franchise Web Scorer weighs two opportunities in your browser. The reading below matters more than any tool, though, so here it is either way.
What is FDD Item 19?
Item 19 is the “Financial Performance Representations” section of a Franchise Disclosure Document (FDD), the disclosure a franchisor must give you under the FTC’s Franchise Rule. The rule sets out 23 numbered items, and 16 CFR 436.5(s) (opens in new tab) governs the nineteenth.
Four facts define how it works:
- It is optional. In the FTC’s words from A Consumer’s Guide to Buying a Franchise (opens in new tab), “The Franchise Rule doesn’t require a franchisor to provide sales or earnings information, but most do.”
- It is exclusive. The rule’s prohibitions section, 16 CFR 436.9(c) (opens in new tab), bars a franchise seller from giving you any financial performance representation unless it has “a reasonable basis and written substantiation for the representation at the time the representation is made, and the representation is included in Item 19.”
- It is broad. The rule’s definition (opens in new tab) covers any oral, written or visual claim stating “a specific level or range of actual or potential sales, income, gross profits, or net profits,” and it expressly includes “a chart, table, or mathematical calculation that shows possible results based on a combination of variables.” A sales rep’s napkin math counts.
- You get time to read it. Under 16 CFR 436.2 (opens in new tab), a franchisor must give you the FDD at least 14 calendar-days before you sign a binding agreement or pay the franchisor or an affiliate any money.
What Item 19 must disclose when it makes a financial performance representation
When a franchisor chooses to make an earnings claim, 16 CFR 436.5(s)(3) requires a specific set of disclosures to travel with it. These are the named parts of every compliant Item 19, and each one answers a question you should be asking anyway.
| Part | What the rule requires | The question it answers |
|---|---|---|
| Type of claim | Whether it is historical performance of existing outlets (all, or a subset) or a forecast of your future performance | Is this what happened, or what they predict? |
| Which outlets | Whether the figure covers all existing outlets or only a subset sharing particular characteristics, such as location type, length of time open, or franchised vs. franchisor-owned | Who got left out of the number? |
| Dates | When the reported performance was achieved | How old is this? |
| Outlet counts | The total number of outlets in the period, the number with the described characteristics, and the number whose data was actually used | How big is the sample, really? |
| Attained or surpassed | Of the outlets whose data was used, “the number and percent that actually attained or surpassed the stated results” | How many actually hit the number? |
| Differing characteristics | Characteristics of the included outlets that may differ materially from the outlet offered to you | Is my location like theirs? |
| Forecast assumptions | For a projection, the material bases and assumptions, such as market conditions, cost of goods and operating expenses | What has to go right for this to come true? |
| Admonition | A clear and conspicuous statement that your individual results may differ | Is any of this a promise? (No.) |
| Substantiation | A statement that written substantiation will be made available on reasonable request | Can I see the data? |
A franchisor that makes no earnings claim does not get to leave Item 19 blank. The rule requires it to state: “We do not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets.” That statement matters as much as a number does. What it means when a franchise has no Item 19 numbers covers what to do with it.
The average-and-median rules in NASAA’s Item 19 commentary
The federal rule sets the floor. The North American Securities Administrators Association (NASAA) adopted a more detailed Commentary on Financial Performance Representations (opens in new tab) in May 2017, answering questions about exactly how an Item 19 should present its numbers. If the FDD in front of you was prepared to that commentary, these are the patterns to expect, and their absence is worth a question:
- An average comes with a median. Whenever an Item 19 discloses an average, the commentary says it must also disclose the median, “because the existence of outliers may skew an average.” The reverse applies too.
- Gross sales averages come with a range. An average or median of gross sales must also show the highest and lowest numbers.
- The best come with the worst. A claim based on a subset of top-performing outlets must also show the corresponding lowest-performing subset. If an Item 19 shows the top 10%, the commentary says it must also show the bottom 10%.
- Closed outlets can be excluded, but must be counted. An average or median may leave out outlets that closed during the period, provided the Item 19 discloses how many closed, including how many closed after being open less than 12 months.
- Small systems face a presumption against subsets. A franchisor with fewer than 10 substantially similar outlets is presumed to have too few to base a claim on a subset.
- Projections need the brand’s own history. A forecast must rest on historical results from the brand being offered, not on other brands or industry reports.
- The warning has fixed wording. The commentary’s example admonition, in bold and in its own paragraph, reads: “Some outlets have earned this amount. Your individual results may differ. There is no assurance that you’ll earn as much.”
Seven things an Item 19 can hide in plain sight
An Item 19 can comply with every rule above and still leave a buyer with the wrong impression. Nothing here requires the franchisor to be dishonest. It only requires you to read the headline and stop.
- Sales are not profit. A gross sales figure leaves out every cost of running the outlet. The FTC warns that “An outlet with high gross sales on paper might be losing money because of high overhead, rent and other expenses.” A sales figure tells you the size of the business, not the size of your paycheck.
- An average flatters. The FTC’s guide notes that “the high incomes of just a few very successful franchises can inflate the average for all franchisees.” Always find the median. When the average sits well above the median, the typical outlet is doing noticeably worse than the headline.
- The subset does the talking. “Outlets open at least 24 months” sounds reasonable, and it quietly excludes every outlet still in its first two years, which is exactly where you would be. Read the subset definition before the number.
- Closed outlets stop counting. An outlet that failed during the year may be excluded from the average entirely. The disclosed count of closures tells you how much of the bad news left the dataset.
- Company-owned outlets play by different math. The FTC points out that “Company-owned outlets often have lower costs because they can buy equipment, inventory and other items in larger quantities at lower prices or may own, rather than lease, their property.” A figure that blends them in, or leans on them, may not describe a franchisee’s economics.
- Geography travels badly. Sales from dense metro locations say little about a suburban strip or a small town. The rule requires the franchisor to disclose characteristics of the included outlets that may differ materially from yours; look for them.
- The percent that hit it is the real headline. The “attained or surpassed” count is required for historical claims. If 41% of outlets reached the stated average, 59% did not.
Worked example: turning an Item 19 into owner earnings
The only way to find out what an Item 19 means for you is to push it through a profit and loss statement built on your own costs. Here is how that looks with one hypothetical franchise.
Imagine a quick-service café franchise whose Item 19 reports the following for its most recent fiscal year:
| Item 19 figure | Hypothetical value |
|---|---|
| Franchised outlets at year end | 212 |
| Outlets in the claim | 148 (open at least 24 months) |
| Average gross sales | $812,000 |
| Median gross sales | $694,000 |
| Highest gross sales | $2,100,000 |
| Lowest gross sales | $188,000 |
| Outlets at or above the average | 61 of 148 (41%) |
| Outlets closed during the year and excluded | 17 |
Now apply costs. Royalty and brand fund rates come from Item 6 (Other Fees). Everything else should come from your own quotes and from the franchisees you call, not from the franchisor’s pro forma. For this example, assume:
- Royalty: 6% of gross sales
- Brand fund: 2% of gross sales
- Food and supplies: 30% of gross sales
- Hired labor (not counting you): 30% of gross sales
- Other operating costs: 10% of gross sales
- Rent: a fixed $62,460 a year
- Loan: $450,000 of a $620,000 total investment, financed over 10 years at an assumed 10% interest rate, or about $71,361 a year in payments
| Line item | At the median | At the average | At the lowest |
|---|---|---|---|
| Gross sales | $694,000 | $812,000 | $188,000 |
| Royalty (6%) + brand fund (2%) | −$55,520 | −$64,960 | −$15,040 |
| Food and supplies (30%) | −$208,200 | −$243,600 | −$56,400 |
| Hired labor (30%) | −$208,200 | −$243,600 | −$56,400 |
| Other operating costs (10%) | −$69,400 | −$81,200 | −$18,800 |
| Rent (fixed) | −$62,460 | −$62,460 | −$62,460 |
| Operating profit | $90,220 | $116,180 | −$21,100 |
| Loan payments | −$71,361 | −$71,361 | −$71,361 |
| Left for the owner, before tax | $18,859 | $44,819 | −$92,461 |
Three things fall out of that table:
- The headline and the typical outlet are $25,960 apart in owner earnings, purely from choosing the average instead of the median.
- At the median, the owner works full time for $18,859 before tax. The $170,000 of cash put in would take about nine years to earn back at that rate, with no salary drawn at all.
- The bottom of the range loses money before the loan is paid. And the 17 outlets that closed are not in that range.
None of this makes the hypothetical franchise a bad buy. It might be excellent in the right location with an owner who replaces part of that hired labor. The point is that the $812,000 slide could not tell you, and a P&L on your own numbers can.
What it means when a franchise has no Item 19 numbers
A franchise with no earnings claim is not necessarily hiding something. But it moves the whole burden of estimating earnings onto you, and it changes what anyone selling the franchise may say.
The required statement continues: “We also do not authorize our employees or representatives to make any such representations either orally or in writing.” So when there are no Item 19 numbers:
- Treat any figure you hear as a red flag. The FTC’s Franchise Fundamentals guidance for buyers (opens in new tab) is direct: if a franchisor or seller has said things about sales or earnings in discussions with you that are not in the FDD, “raise the red flag.” The Item 19 statement itself tells you to report it to the franchisor’s management, the FTC and the appropriate state agencies.
- Know the two narrow exceptions. Under the rule, a franchisor may give you the actual records of an existing outlet you are considering buying, or a written supplement to an Item 19 that already contains a claim. Neither exception covers a verbal “most of our owners do around…”
- Build the numbers from franchisees. Item 20 is where the contact lists live, and it is your substitute data source (see How to check Item 19 against the rest of the FDD).
How to check Item 19 against the rest of the FDD
Item 19 is one of 23 items, and several of the others exist partly to test it. Read them side by side.
| FDD item | What it contains | What to check against Item 19 |
|---|---|---|
| Item 5: Initial Fees | The initial franchise fee and any conditions for a refund | Part of the cash you must earn back |
| Item 6: Other Fees | Every ongoing fee, including royalties and fund contributions, with formulas | The percentages to subtract from gross sales |
| Item 7: Estimated Initial Investment | The total estimated cost to open, by expense type | The investment your payback is measured against |
| Item 20: Outlets and Franchisee Information | Three years of outlet openings, terminations, non-renewals, reacquisitions and closures, plus current and former franchisee contact lists | Whether closures excluded from Item 19 are a trickle or a pattern |
| Item 21: Financial Statements | The franchisor’s own financial statements, generally audited | Whether the franchisor is healthy enough to support you |
Item 20 deserves the most time. It must list current franchisees with outlet phone numbers, and every franchisee whose outlet was terminated, not renewed or otherwise stopped operating during the last fiscal year. It must also disclose whether franchisees signed confidentiality clauses in the last three years, so a former owner who declines to talk may simply not be allowed to.
It also helps to read an older FDD for the same brand, to see whether the Item 19 subset or method changed from one year to the next. Some states that register franchises publish filings; Wisconsin’s Department of Financial Institutions runs a public franchise filing search (opens in new tab) where you can look up a brand and download its filed FDD.
Questions to ask about an Item 19 before you sign
Take this list to the franchisor, to the franchisees you call, and to the franchise attorney and accountant you hire.
Ask the franchisor
- May I have the written substantiation for the Item 19 claim?
- Which outlets were excluded from the figure, how many, and why?
- What is the median, and what were the highest and lowest results?
- How did outlets in their first 24 months perform?
- Does the figure include franchisor-owned outlets, and do they pay the same royalty and rent a franchisee would?
Ask current and former franchisees (from Item 20)
- How do your gross sales compare to the Item 19 figure?
- After royalties, rent, labor and loan payments, what did you actually take home in years one, two and three?
- How long did it take to break even?
- Knowing what you know now, would you buy again?
Score what you learn
Once you have real answers, the decision is no longer one number. It is investment, royalties, projected return, support, territory, lock-in and track record, and they rarely point the same way. Weighted decision scoring lets each factor count as much as it matters to you. The Franchise Decision Helper builds that scorecard for up to four opportunities, including the option of keeping your money and not buying at all. If the real alternative is growing something you already run, deciding when to quit your job for your side hustle is the same question with a different starting point.
Common questions about FDD Item 19
Is a franchisor required to put earnings in Item 19?
No. Item 19 is optional. A franchisor that makes no financial performance representation must say so in Item 19, using the rule’s own statement. A franchisor that does make one must put it in Item 19, with a reasonable basis and written substantiation behind it.
Can a franchise salesperson tell me what I will earn?
Not lawfully, unless the figure is in Item 19. The FTC rule makes it a violation to give a prospective franchisee any financial performance representation that is not in Item 19. The narrow exceptions are the actual records of an existing outlet you are considering buying, and a written supplement to an Item 19 that already contains a claim.
What does “attained or surpassed” mean in Item 19?
It is the count of outlets that actually hit the number being claimed. For a historical claim the rule requires the number and percent of the outlets in the data that attained or surpassed the stated result. When that claim is an average and the percent is well under half, most of those outlets did worse than the headline.
Can I see the data behind an Item 19?
Yes. A franchisor that makes a financial performance representation must state that written substantiation will be made available on reasonable request, and failing to provide it is itself a violation of the rule. Ask for it in writing, and have an accountant read it with you.
The takeaway: read Item 19 as a dataset, not a promise
An Item 19 is a disclosed dataset with a definition attached. Read the definition first: which outlets, which dates, which measure, how many hit it. Then subtract the fees in Item 6, measure it against the investment in Item 7, check the closures in Item 20, and rebuild the result on your own costs. The number on the slide is where your analysis starts, not where it ends.
Sources
- 16 CFR 436.5, Disclosure items (Item 19 is paragraph (s)) (opens in new tab)
- 16 CFR 436.9, Additional prohibitions (opens in new tab)
- 16 CFR 436.1, Definitions (opens in new tab)
- 16 CFR 436.2, Obligation to furnish documents (opens in new tab)
- FTC: A Consumer’s Guide to Buying a Franchise (opens in new tab)
- FTC: Franchise Fundamentals guidance for buyers (opens in new tab)
- NASAA Commentary on Financial Performance Representations (2017) (opens in new tab)
- Wisconsin DFI franchise filing search (opens in new tab)
Disclaimer: This post is for informational and educational purposes only and does not constitute legal, financial, tax, accounting, or investment advice. Franchise disclosure rules, state registration requirements and every franchise agreement differ, and the worked example uses invented figures — consult a licensed franchise attorney and a CPA before you sign a franchise agreement or pay any franchise fee.
