A financial figure is not the same as a reliable expectation. A franchise system may report strong sales, attractive averages or favorable results from selected outlets, but those numbers reveal little until the reader understands exactly what was measured and how the representation was prepared.
Franchise Earnings Claims appearing in Item 19 of a Franchise Disclosure Document require examination of the financial metric, reporting period, outlet sample, exclusions, assumptions and associated costs. A figure based on gross revenue has a different meaning from operating income, while an average drawn from mature locations may have limited relevance to a new outlet entering a different market.
Historical performance can provide evidence about what certain outlets achieved under specified conditions. It cannot guarantee what another franchisee will earn. Projections require even greater care because they depend on assumptions about sales, pricing, expenses, demand and operating conditions that may not materialize.
What Item 19 Permits—and What It Does Not Promise
Item 19 is the part of the Franchise Disclosure Document in which a franchisor may present a Financial Performance Representation, commonly called an FPR. Under 16 CFR § 436.5(s), a franchisor may provide information about the actual or potential financial performance of franchised or franchisor-owned outlets when the information has a reasonable basis and appears in the disclosure document.
Providing an FPR is optional. When a franchisor elects not to make one, Item 19 must contain the prescribed statement explaining that the franchisor does not make representations about future franchisee performance or the past performance of company-owned or franchised outlets. The statement also says that employees and representatives are not authorized to make such representations, subject to the rule’s treatment of an existing outlet offered for sale.
If an FPR is made, the franchisor must possess written substantiation and a reasonable basis for it when the representation is made. Inclusion in Item 19 does not mean that the FTC has approved the figures, evaluated the investment or concluded that a prospective franchisee will achieve comparable results. The FTC Franchise Rule establishes disclosure obligations; it does not certify profitability.
Historical Results and Financial Projections Are Different
A reader should first determine whether Item 19 reports completed operating results or forecasts future performance.
| Representation type | Information source | Core assumptions | Main evaluation question | Primary limitation |
| Historical representation | Actual results from existing outlets or a defined subset | The measured outlets are sufficiently comparable to the offered franchise | Which outlets produced the results, during what period and under what conditions? | Past results may not reflect a new outlet, different market or current cost environment |
| Projection | Forecast based on specified data and assumptions | Future sales, demand, pricing, expenses and operating conditions develop as assumed | Are the supporting data and material assumptions reasonable and sufficiently explained? | Forecast inputs may not occur as projected |
A historical representation can cover all system outlets or a subset sharing particular characteristics. The disclosure should identify the measured group, dates, available outlet population, outlets supplying data and the proportion that attained the represented result.
A projection estimates possible future performance. It requires disclosure of the material bases and assumptions supporting the forecast. Readers should not treat projected figures as if they were audited results already achieved by comparable franchisees.
The Anatomy of a Useful Item 19 Disclosure
A useful performance disclosure allows a reader to reconstruct what the figure actually represents. Examine these components:
- Exact financial metric: Determine whether the figure concerns sales, revenue, gross profit, operating income, net income, cash flow or another defined measure.
- Reporting period: Identify the fiscal year, calendar year, monthly period or other interval covered.
- Outlet group: Establish whether the data concern the entire system, a regional subset, mature outlets or another selected group.
- Group size: Find the total number of outlets sharing the stated characteristics.
- Achievement rate: Identify the number and percentage of relevant outlets that attained or exceeded the represented result.
- Statistical method: Distinguish among average, median, range, quartile or another presentation.
- Ownership type: Determine whether the data come from franchised outlets, company-owned locations or both.
- Operating age: Check whether new locations were separated from mature outlets.
- Market and format: Look for geographic, seasonal, size, format or operating-model differences.
- Exclusions: Identify locations omitted because they closed, transferred, lacked a full year of operation or failed to provide data.
- Assumptions: For projections, determine which conditions must hold for the forecast to remain meaningful.
- Substantiation: Confirm that written support is available upon reasonable request.
These details affect relevance as much as the headline number. An accurately calculated result may still be a weak comparison if its sample differs materially from the outlet being offered.
Gross Revenue Is Not Owner Profit
Gross sales or gross revenue generally describe sales before many operating expenses are deducted. Net sales reflect specified reductions from sales, but the disclosure must identify those reductions rather than leaving the reader to assume them.
Other measures require equally careful definition:
- Gross profit generally subtracts defined direct costs or cost of goods sold from revenue.
- Operating income or operating profit subtracts specified operating expenses but may exclude interest, taxes, financing costs or owner-specific expenses.
- Net income is the accounting remainder after the expenses included in the stated calculation.
- Cash flow measures cash generated or used during a period and is not automatically equivalent to accounting profit.
- Owner compensation may include wages, salary or distributions and should not automatically be added to, or treated as, business profit.
The disclosure’s definitions and calculation method control the interpretation. Labels alone are insufficient because accounting presentations can differ.
A high revenue figure may coexist with substantial royalties, advertising contributions, payroll, occupancy, equipment, inventory, insurance, technology, local marketing, maintenance, taxes, debt service and owner-compensation requirements. Item 19 should therefore be considered alongside the full franchise cost structure, even when the representation itself focuses only on sales.
Average, Median, Range and Percentage Achieving
An average combines all reported values and divides the total by the number of observations. A small group of unusually high-performing outlets can pull that figure upward.
The median is the middle observation after the results are arranged from lowest to highest. It may provide a different view of the center, particularly when outlet performance is uneven. Neither measure is inherently superior; each answers a different question.
A range shows the distance between reported low and high results but may conceal how outlets are distributed within it. Quartile data describe a particular segment. Results for the top quartile, for example, should not be treated as typical of the complete system.
The denominator is essential. “Twenty outlets exceeded the stated figure” has a different meaning when the sample contains 25 outlets than when it contains 200. Readers should examine both the number and percentage attaining or surpassing the result, together with the population from which the sample was drawn.
The FTC Franchise Rule Compliance Guide explains that historical FPRs must disclose relevant outlet counts and, when a stated performance level is claimed, the number and percentage that attained or surpassed it.
Which Outlets Were Included—and Which Were Left Out?
Sample selection determines what the disclosure can reasonably show. Company-owned outlets may operate with different purchasing arrangements, management structures, economies of scale or cost burdens from franchised locations. If both types are included, their results should be identified clearly enough to permit a meaningful comparison.
Operating age also matters. Mature locations may have established customers and stable staffing, while recently opened outlets may still be building demand. A mature-outlet sample can be informative, but it does not describe the early operating period unless the disclosure separately addresses it.
Readers should also check how the representation treats:
- outlets that closed during the measured period;
- transferred, reacquired or terminated locations;
- seasonal businesses;
- partial-year operators;
- different regions or market sizes;
- nonstandard formats or outlet sizes;
- high-volume or otherwise selected groups;
- locations that did not respond to a survey.
An exclusion is not automatically improper or misleading. A recently opened outlet may reasonably be excluded from a full-year comparison. The critical questions are whether the exclusion is disclosed, why it was made and how it limits comparability.
Time Period, Market Conditions and Stale Data
The reporting dates establish the conditions under which the represented results occurred. Readers should note whether Item 19 covers one year, several years or a narrower period and whether the figures are presented separately or combined.
Older results may lose relevance when prices, labor expenses, occupancy costs, operating formats, customer demand or required technology have materially changed. Inflation may raise nominal revenue while offering no corresponding improvement in purchasing power or outlet profitability.
System maturity matters as well. Early company-owned results may not reflect the later experience of a larger franchise network. Conversely, a mature-system average may offer limited insight into the ramp-up period of a new location.
Compare the representation with later FDD versions when available. A changed sample, revised metric or discontinued table may be as informative as the headline result, although the reason for the change should not be assumed without supporting evidence.
How to Evaluate a Financial Projection
A projection should be tested by separating its principal inputs:
- Sales volume: What customer count, transaction volume or unit sales does the forecast assume?
- Pricing: Are the assumed prices identified, and do they reflect the proposed market?
- Demand: What market study, operating history or other evidence supports expected customer demand?
- Ramp-up: How quickly is the outlet expected to reach the projected operating level?
- Labor and occupancy: What staffing, wage, rent and related assumptions are used?
- Seasonality: Does the forecast account for periods of stronger and weaker demand?
- Marketing: What local spending is required to support the assumed sales?
- Break-even timing: Which definition of break-even is being used, and what must happen before it is reached?
- Capital needs: Does the model allow for working capital, replacements or additional funding during the ramp-up period?
- Sensitivity: What happens to the projected result if revenue is lower, the opening is delayed or major costs are higher?
The purpose of this review is not to create a new forecast. It is to determine which assumptions drive the disclosed result and how sensitive that result may be to reasonable variation.
Written Substantiation and Reasonable Basis
A franchisor making an Item 19 representation must have a reasonable basis and written substantiation when the claim is made. It must also state that substantiation will be made available to a prospective franchisee upon reasonable request.
Supporting material may include outlet records, franchisee profit-and-loss statements, survey methodology, market studies, statistical analyses or worksheets showing how the represented figure was calculated. The appropriate support depends on whether the claim reports historical performance or projects future results.
The existence of documents does not settle every question. Readers should still examine whether the records cover the disclosed population, whether the calculation matches Item 19, how missing responses were handled and whether the data remain relevant. Written support strengthens traceability; it does not guarantee future performance or remove the need for independent analysis.
Oral Statements, Broker Claims and Marketing Materials
Sales presentations, broker conversations, webinars, advertisements, emails, spreadsheets and social-media promotions should be compared directly with the current Item 19.
The federal rule’s definition of an FPR can cover oral, written or visual representations that state or imply a specific level or range of actual or potential sales, income or profits. A broker or sales representative generally cannot avoid the disclosure framework simply by communicating the figure orally.
Different financial information is permitted in limited circumstances. A franchisor may provide the actual records of an existing outlet to a prospective purchaser considering that specific outlet. If Item 19 already contains an FPR, the franchisor may also prepare a written supplemental representation for a particular location or variation. According to the FTC compliance guidance, that supplement should explain its departure from Item 19 and meet the applicable standards for financial performance claims.
The FTC’s consumer franchise guide likewise advises readers to compare sales and earnings statements with Item 19 and recognizes the existing-outlet and supplemental-representation exceptions. A statement’s context and documentation should be established before drawing conclusions about compliance.
Comparing Financial Claims With Item 3 Litigation History
Disputes alleging inaccurate or unauthorized financial representations may appear in the litigation history disclosed in Item 3 when they satisfy the rule’s disclosure criteria.
A disclosed lawsuit does not prove that the financial allegation was true. A dismissal does not automatically establish that it was false. Pleadings contain party allegations, while orders, judgments and settlements may address different legal or factual issues. The current docket and outcome therefore require separate review.
A Practical Item 19 Evaluation Sequence
- Confirm that the FDD is current for the offering being considered.
- Locate Item 19 and read its definitions and footnotes.
- Determine whether the franchisor makes an FPR or uses the prescribed no-representation disclosure.
- Define the exact financial metric and calculation method.
- Identify the outlet population and measured subgroup.
- Check sample size, reporting participation and exclusions.
- Compare the average, median, range and percentage achieving where provided.
- Separate revenue from profit, cash flow and owner compensation.
- Review the material bases and assumptions behind any projection.
- Request available written substantiation with reasonable time for production.
- Compare oral, advertising, broker and spreadsheet statements with Item 19.
- Review relevant costs, current and former franchisee experiences, and professional financial or legal analysis.
The FTC’s FDD review guidance emphasizes examining the disclosure document critically and asking questions before signing an agreement or making a required payment.
Questions to Ask About an Item 19 Representation
- How many outlets were eligible for the measured group?
- How many outlets were included, and how many supplied data?
- Why were any outlets excluded?
- Is the figure an average, median, range, quartile or selected threshold?
- How many and what percentage attained or exceeded the stated result?
- Are company-owned and franchised outlets mixed together?
- Are recently opened, closed or transferred locations reflected?
- Which expenses are included or excluded from the reported metric?
- Are owner wages or distributions included?
- What material assumptions support a projection?
- Is written substantiation available?
- Do current and former franchisees report experiences that are reasonably comparable?
Common Franchise Earnings Claim Errors
- Treating revenue as profit: Identify every deduction included in the disclosed metric.
- Relying only on an average: Review the median, range and distribution where available.
- Ignoring the denominator: Establish the total eligible and measured populations.
- Overlooking exclusions: Determine which outlets were omitted and why.
- Mixing ownership types: Separate company-owned results from franchisee results.
- Relying on top performers: Do not generalize a selected high-volume group to the system.
- Treating a forecast as a guarantee: Test its data, assumptions and sensitivity.
- Accepting oral figures in isolation: Compare them with Item 19 and permitted written supplements.
- Ignoring later disclosures: Check whether a newer FDD updates the period or methodology.
- Underestimating costs: Evaluate what remains after the complete operating cost base.
Financial Performance Requires Context
Item 19 can provide useful evidence about the performance of identified outlets or the assumptions supporting a forecast. Its value depends on precise definitions, a relevant sample, transparent exclusions, an understandable calculation method and substantiation that supports the representation as presented.
Historical results show what specified outlets achieved under past conditions; they are not promises about a new location. Revenue must be considered separately from profit, cash flow and owner compensation, with the associated costs understood before the figure can be interpreted responsibly.
Professional accounting, financial and legal review may be appropriate when the metric is unclear, the sample differs materially from the proposed outlet, projection assumptions are difficult to test or sales communications appear inconsistent with the disclosure.
Frequently Asked Questions
Is a franchisor required to provide earnings information in Item 19?
No. The FTC Franchise Rule permits, but does not require, a franchisor to make a Financial Performance Representation. A franchisor that does not make one must include the rule’s prescribed no-representation disclosure in Item 19.
What is a Financial Performance Representation?
It is a representation to a prospective franchisee that states or implies a specific level or range of actual or potential sales, income, gross profit or net profit. It may be oral, written, visual or presented through a calculation showing possible results.
Is gross revenue the same as franchise profit?
No. Gross revenue generally measures sales before many operating expenses. Profit depends on the specific costs deducted and the accounting definition used. The Item 19 definitions and calculation method must be reviewed.
Can a sales representative provide figures not shown in Item 19?
Generally, a financial performance claim made to a prospective franchisee must appear in Item 19. Limited exceptions address actual records for a specific existing outlet offered for sale and properly prepared written supplemental representations tied to an Item 19 disclosure.
Can a prospective franchisee request written substantiation?
Yes. When an FPR is made in Item 19, the franchisor must state that written substantiation will be made available to a prospective franchisee upon reasonable request. Reasonableness may account for the time and location needed to produce or review the records.
BlingleLawsuit is an independent legal-information publication. This article provides general information about franchise financial performance disclosures and does not constitute legal, accounting, financial or investment advice.
