Item 19 of the Franchise Disclosure Document (FDD) is where a franchisor may choose to disclose financial performance information about the franchise opportunity. When it is done clearly and supported by reliable data, Item 19 helps prospective franchisees understand unit-level results and evaluate risk. When it is incomplete, inconsistent, or presented without adequate context, it can create compliance exposure and mislead buyers. This page explains what can be said in Item 19, what it takes to substantiate it, and how both franchisors and prospective franchisees should approach these disclosures with care.
Laws vary by state, and federal and state regulators can apply different standards or expectations to franchise disclosures. The information below is general and for educational purposes only. For related guidance, see Designing Compliant Financial Performance Representations (Item 19): Legal Basics for Franchisors.
What Item 19 Covers: Purpose, Scope, and When Financial Performance Representations Are Made
Item 19 addresses financial performance representations (FPRs)—any communication, whether written, oral, or digital, that states or suggests actual or potential sales, income, profits, costs, or other financial metrics for a franchise or franchised outlets. Importantly, an FPR is not limited to the FDD. Marketing materials, sales presentations, webinars, emails, and even casual statements can be considered FPRs if they imply performance results. If a franchisor makes any FPR, it generally must include a corresponding Item 19 that contains the same category of information, presented in a balanced and substantiated way. For related guidance, see FDD Preparation Checklist: Documents, Financials, and Data to Gather Before Drafting.
The purpose of Item 19 is to provide a fair, data-driven picture of unit performance. It allows franchisors to share historical results and, in limited circumstances, other metrics that help prospective franchisees assess what operating a unit might look like. It is optional to include Item 19, but once a franchisor makes any FPR in any medium, Item 19 becomes functionally necessary to remain compliant with franchise disclosure rules.
Two practical guardrails help define the scope of Item 19:
- If the representation could lead a reasonable prospect to believe something about revenues, costs, profitability, or other financial outcomes, it is an FPR.
- If you make an FPR, the FDD's Item 19 should include the same or broader context and all related assumptions, definitions, and limitations, supported by reliable data.
Permissible FPR Formats: Revenue, Gross Sales, Costs, Unit-Level Metrics, and Cohort Breakouts
Franchisors can present a range of financial performance metrics in Item 19 if they have credible support and explain the methodology. Common formats include:
- Gross sales or revenue. Often presented as averages, medians, ranges, or percentiles across all reporting units or a defined subset. Cohort notes should explain which units are included or excluded and why.
- Unit-level costs and expenses. Some franchisors disclose cost categories such as cost of goods sold (COGS), labor, occupancy, marketing, technology, and royalties. These can be useful but must be clearly defined and consistent with chart of accounts.
- EBITDA or other profit proxies. If disclosed, define exactly how the number is calculated and what is excluded (e.g., owner compensation, interest, taxes, depreciation, amortization). Be careful to avoid implying net profit unless the math truly reflects it.
- Operating metrics. Units, transactions, average ticket, customer counts, utilization, membership churn, or other drivers of revenue can be disclosed if they are relevant and accurately tracked across units.
- Ramp-up timelines. Some systems show month-by-month or year-by-year revenue cohorts for new units to illustrate typical ramp. These must include time frames, sample sizes, and a clear definition of “opening date.”
- Cohort breakouts. Geography, venue type, square footage, urban vs. suburban, mall vs. street, or other business model variations may be separated if differences are material and the cohorts are fairly drawn and explained.
Regardless of format, the guiding principle is transparency: define the population, state sample size, note exclusions, explain calculations, and avoid formats that could reasonably mislead a prospect. Charts and summaries can help, but the underlying definitions and assumptions matter more than graphics.
What It Takes to Substantiate an FPR: Data Sources, Methodology, Time Frames, and Consistency
Substantiation means having data and documentation sufficient to support each representation made in Item 19 and elsewhere. At a practical level, franchisors should be prepared to:
- Identify reliable data sources. Point-of-sale (POS) exports, accounting platform reports, franchisee financial statements, tax filings, bank statements, and royalty reports are common sources. The more direct and standardized the source, the stronger the support.
- Use consistent definitions. “Gross sales,” “net sales,” “system sales,” and “EBITDA” should be defined precisely and used consistently across the FDD, franchise agreement, and marketing materials. Inconsistency creates risk.
- Explain the methodology. Item 19 should describe how figures were calculated, including aggregation rules, treatment of partial-year units, bad debt, returns, discounts, gift cards, and third-party marketplace sales.
- Specify the time frame. State the period covered (e.g., most recent fiscal year, trailing 12 months) and any special circumstances (e.g., unusual closures). If multiple years are included, explain comparability.
- Maintain workpapers. Keep a complete set of calculations, data extracts, and notes that can replicate each figure. This includes cohort criteria, inclusion/exclusion lists, and any adjustments such as accrual vs. cash basis.
- Verify accuracy. Reconcile POS or accounting data to royalty reports and, where feasible, cross-check against financial statements or tax returns. Resolve anomalies and document the process.
- Align all channels. Any FPR in sales decks, websites, discovery day slides, or verbal conversations should not exceed or contradict the Item 19 presentation. If it does, the Item 19 typically must be updated or outside statements removed.
Substantiation is ongoing. As the system evolves, new brand variants, delivery channels, or pricing changes can impact metrics and comparability. Build a process to refresh data and reconsider cohort definitions to keep disclosures current and fair.
Presentation Standards: Clear Definitions, Averages vs. Medians, Disclaimers, and Outlier Handling
Even strong data can become risky if presented in a way that overstates typical performance. Consider the following presentation practices:
- Define every key term. If you publish “average unit volume,” specify whether it is arithmetic mean or weighted, whether partial-year units are included, and how you handle openings, closures, and transfers.
- Averages vs. medians. Averages can be skewed by top performers; medians often represent the midpoint more clearly. Many franchisors present both and add interquartile ranges to show distribution. If you show a top quartile, say how many units are in it.
- Outlier policy. If excluding outliers, state the rule (e.g., units closed for more than X days due to non-operational reasons) and apply it uniformly. Selective removal of low performers can be viewed as cherry-picking.
- Completeness of cohorts. Explain inclusions and exclusions (e.g., new units open less than 12 months; non-traditional venues). Avoid including company-operated units unless clearly identified and comparable to franchisee units.
- Disclaimers and context. Include plain-English context about variability by market, operator capability, seasonality, and other factors. Disclaimers do not cure defective data, but they help set expectations and reduce confusion.
- Graphs and visuals. If using charts, include source notes, sample sizes, and definitions in proximity to the graphic. Visuals should reflect the same numbers as the narrative and tables.
For multi-concept or evolving brands, carefully segment data. If adding new formats (e.g., smaller footprints or different service models), separate those units or clearly disclose how results differ.
Frequent Compliance Traps: Cherry-Picking, Corporate vs. Franchisee Data, Projections, and Updates
Certain patterns frequently trigger compliance concerns or disputes. Watch for:
- Cherry-picking locations. Publishing only top-performing units or excluding low performers without a principled rule can mislead prospects. Cohorts should be selected using objective, pre-defined criteria applied consistently.
- Blending corporate and franchisee data. Company-operated units often have different labor costs, occupancy structures, or purchasing arrangements. If included, they should be broken out and only combined where comparable, with clear labels.
- Unlabeled projections or “aspirational” statements. Forward-looking statements carry heightened risk and are often restricted. Avoid implying future results unless the presentation clearly distinguishes historical data and, where allowed, uses grounded, documented assumptions with appropriate qualifiers.
- Mismatch across documents. If sales teams use numbers that do not appear in Item 19, that is typically a compliance issue. All channels should align with the FDD's Item 19.
- Stale data and mid-year changes. Material changes in performance, system size, or business model during the year may necessitate an update to Item 19 and revised FDD delivery. Monitor triggers and timelines under applicable rules.
- Overlooking unit losses and closures. If closures or transfers are high, omitting context in Item 19 can present an incomplete picture. Consider cross-referencing Item 20 trends and explaining how they relate to performance.
For emerging brands, discipline matters. It is better to present conservative, well-supported figures than to publish aggressive numbers that are hard to defend later.
Before publishing or relying on an Item 19, consider discussing representation and risk with counsel. To speak with our firm about drafting, reviewing, or updating a compliant Item 19—or to request an FDD and Item 19 analysis as a prospective franchisee—use our contact form or call 414-253-8500 to schedule a consultation.
How to Read (and Question) Item 19 as a Prospective Franchisee—and When to Seek Counsel
Prospective franchisees should treat Item 19 as one input among many. An effective review is systematic, skeptical, and focused on how the numbers apply to your situation. Consider the following steps:
Understand what is actually being shown
- Scope. Is this data from all units, only franchisee units, or a subset?
- Time frame. Is it last fiscal year, trailing 12 months, or multi-year? Any unusual periods?
- Inclusions/exclusions. Are new units, non-traditional venues, or partial-year locations included?
- Definitions. How are revenue and key expenses defined? Are owner wages included or excluded?
Look for distribution, not just averages
- Compare averages to medians. Large gaps can signal skew.
- Check ranges or quartiles to see where most units fall versus outliers.
- Ask for clarity if performance varies widely across markets or formats.
Assess comparability to your market and plan
- Evaluate geography, demographics, venue type, and square footage.
- Consider ramp-up periods and working capital needs, including seasonality.
- Confirm whether the data reflects reliance on third-party delivery, staffing models, and pricing similar to your plan.
Reconcile Item 19 with other parts of the FDD
- Compare Item 19 to Item 5–7 (fees and estimated initial investment) and Item 20 (outlet growth, transfers, and closures) for a coherent picture.
- Review the franchise agreement's definitions of gross sales, required vendors, technology systems, and marketing obligations to ensure alignment with the data assumptions.
Ask focused questions
- What percentage of units met or exceeded the average, and how many units are in the sample?
- How were closed or transferred units treated?
- What verification process was used for franchisee-reported numbers?
- Are there meaningful differences between company-operated and franchised outcomes?
Consider seeking counsel before signing or paying significant funds. A targeted Item 19 and FDD review can help flag inconsistencies, unrealistic assumptions, or market-specific risks. To discuss hiring counsel for an FDD and Item 19 analysis before you proceed, reach out through our contact form or call 414-253-8500.
Building a Defensible Item 19: Practical Steps for Franchisors
Create a data governance framework
- Standardize chart of accounts and POS reporting with naming conventions that map to disclosed categories.
- Adopt written policies for unit eligibility, outlier handling, and cohort definitions.
- Maintain version-controlled workpapers and audit trails for all published numbers.
Collect and verify systematically
- Use technology integrations where possible to pull consistent, time-stamped data from POS or accounting systems.
- Cross-check franchisee submissions against royalties, bank deposits where available, or periodic attestations.
- Resolve discrepancies and document the resolution process.
Draft with the reader in mind
- Use plain-English definitions and include sample sizes alongside every figure.
- Present both averages and medians, with ranges or quartiles, to show distribution.
- Label charts and tables with clear notes on methodology, time frames, and exclusions.
Align the field with the FDD
- Train franchise development staff so that conversations, emails, and presentations stay within the four corners of Item 19.
- Maintain an approval process for marketing materials containing any financial references.
- Update Item 19 and related materials if a material change occurs or if the system expands in ways that affect comparability.
Revisit regularly
- Set a calendar for periodic review and refresh of Item 19, with checkpoints to evaluate whether new cohorts or segments are needed.
- Monitor system changes such as delivery-channel mix, pricing shifts, new formats, or vendor transitions that affect margins.
Common questions about Item 19 and Financial Performance Representations
Can a franchisor discuss financial performance outside the FDD or Franchise Agreement?
Any statement—verbal, written, or digital—that conveys or implies specific or typical sales, costs, or profits is generally an FPR. If a franchisor makes any such statement outside the FDD, it typically must be backed by a compliant Item 19 that contains the same category of information with appropriate context. Unscripted comments, slide decks, and marketing collateral can all be treated as FPRs. Keeping all financial claims aligned with Item 19 helps reduce compliance risk.
May Item 19 include forward-looking projections or only historical data?
Item 19 most commonly presents historical results. Forward-looking statements carry additional risk and are limited by applicable rules. If a franchisor chooses to include forward-looking content, it should be clearly identified as such, tied to reasonable and documented assumptions, and presented with appropriate qualifiers. Many systems avoid forward-looking FPRs due to the compliance and litigation exposure.
How should franchisee-reported numbers be verified before inclusion in Item 19?
Verification often includes reconciling franchisee reports to POS data and royalty statements, comparing to bank deposits where feasible, and reviewing financial statements or tax filings if available. Clear definitions, consistent accounting treatment, and a documented reconciliation process strengthen support and help ensure apples-to-apples comparisons across units.
When does a franchisor need to update Item 19 during the year?
Updates are driven by regulatory requirements and the materiality of changes. If there is a significant shift in performance, system composition, or business model that affects the accuracy or balance of Item 19, an amendment and re-delivery of the FDD may be required. Timing and triggers depend on federal and state rules, which vary by jurisdiction.
Do Item 19 rules vary by state, and how does that affect disclosures?
Disclosure obligations are influenced by federal regulations and state laws. Some states have additional registration, filing, or enforcement frameworks. Franchisors operating across multiple states should prepare Item 19 with these differences in mind and consider how state-specific requirements may impact the content and timing of disclosures.
Moving forward with compliant Item 19 practices
A well-constructed Item 19 balances clarity and caution. It defines terms precisely, uses cohorts honestly, shows distributions alongside averages, and ties every number to credible, well-documented data. For prospective franchisees, it is a starting point for diligence—not a promise of results. For franchisors, it is an ongoing compliance commitment that should evolve with the system.
If you are preparing, revising, or assessing an Item 19, consider engaging counsel to help evaluate risk, structure cohorts, confirm substantiation, and align sales practices with the FDD. To discuss representation, schedule a consultation through our contact form or call 414-253-8500 to talk through next steps and see whether our firm can help.
Disclaimer: This page provides general information and is not legal advice. Reading it does not create an attorney-client relationship. Laws vary by state and situation. You should consult a qualified attorney about your specific circumstances before taking action.
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