Item 19 Earnings Claims, Decoded

What Item 19 is - and what franchisors are allowed to say

Item 19 is the earnings claim section of the FDD. Under FTC rules, franchisors cannot make any financial performance representation - no revenue projections, no income claims, no "typical" earnings statements - outside of Item 19. If a franchise salesperson tells you "most of our franchisees make $150,000 a year," and that number is not in Item 19, it is an unverifiable verbal claim with no legal force.

Franchisors are not required to publish Item 19 at all. When they do publish it, they can choose exactly what to disclose: gross revenue only, or gross revenue plus expenses, or gross revenue plus SDE, or company-owned unit performance instead of franchisee performance. The format varies enormously between systems.

What to look for: does the Item 19 disclose franchisee data or company-owned unit data? Company-owned units are often the strongest performers in the system (lower labor cost, no royalty payment, management infrastructure advantage). Franchisee medians - not averages, medians - are more representative of what a typical owner-operator will earn.

How to read an Item 19 that actually discloses numbers

When Item 19 is present, read it in this order:

Step 1: Identify the reporting universe. Does it include all franchised units or only those open for a full 12 months or longer? Excluding newer units (where ramp-up depresses performance) inflates the numbers. Check what was excluded and why.

Step 2: Find the median, not the average. A system with 5 locations earning $600K and 95 locations earning $80K has an average of $105K and a median of $80K. The average is misleading. Always use the median as your baseline earnings assumption.

Step 3: Calculate SDE yourself. Gross revenue is not earnings. Subtract the royalty rate (from Item 6), the required marketing contribution (also Item 6), the estimated COGS for the category, and estimated owner-operator labor. The number that remains is close to SDE. Compare that to the asking multiple.

Step 4: Ask franchisees to verify. Call 10 franchisees in comparable markets and ask if their actual results match the Item 19 disclosure. Franchisees are not required to respond, but most will - and the variance between what they report and what Item 19 shows tells you something important about whether the disclosure is representative or cherry-picked.

What to do when Item 19 is missing

When Item 19 is absent, the FDD will state that the franchisor makes no financial performance representations. Your response should be methodical, not emotional.

Request a franchisee contact list from Item 20. Call at least 10 franchisees and ask: (1) gross revenue last 12 months, (2) estimated annual operating expenses excluding owner salary, (3) what the owner paid themselves last year. These three answers let you construct a rough SDE estimate.

Request Item 21 financial statements for the franchisor itself. Royalty revenue divided by average units reveals the system's average gross revenue per unit - an indirect check when franchisees give you round numbers.

If you cannot build a credible earnings picture from franchisee conversations, the absence of Item 19 becomes a deal-stopper, not a yellow flag. A $200,000 franchise investment made without credible earnings data is speculation, not investment.

See also: 7 FDD Red Flags That Should Stop You Cold and SDE vs EBITDA: Which Metric to Use When Reading Earnings.

Frequently Asked Questions