What Does Item 19 Mean for Your Franchise Opportunity?
If you’re considering a franchise opportunity and you have been doing your homework, you probably want to know how much money you can make at a franchise. Many potential franchisees like yourself have been doing more and more research before buying a franchise, and want as much information as possible. Likewise, franchisors have begun to provide more and more information about earnings potential to possible franchisees.
In the Franchise Disclosure Document (FDD), a section called Item 19 is the key to trying to understand the potential profitability of a franchise if you are thinking about buying one. The Item 19 section contains data about earnings and costs of current franchisees, which you can use to try to get an understanding of your potential profits as a franchisee. Of course, Item 19s are also loaded with disclaimers. Franchisors are nervous about you taking their findings too literally and then getting upset if you do not profit as much as some of their current franchisees.
Some franchisors will not supply information in the Item 19 section at all. They are certainly not required to. They may be nervous about problems with potential franchisees taking their data as a claim about how much one can earn. This can be easily mitigated with the right wording. If a franchisor does provide information in their Item 19, they will probably be more successful in gaining franchisees, both because they have provided useful information that helps franchisees make informed decisions, and because their disclosure creates a certain level of trust in the company. This means that it can be advantageous to the franchisor as well as to the franchisee to disclose information in an Item 19. Given these advantages, if a franchisor does not disclose data, it may be because they have something to hide. This is not necessarily the case, so ask them directly about their decision to leave out the Item 19 in their FDD. You will likely learn something about their integrity and the soundness of their franchise opportunity.
Another thing to make sure to do when you get to the Item 19 in an FDD is to read it carefully and thoroughly. Don’t get mixed up between sales and expenses. And most importantly, find out the parameters of the data. A franchisor might release an Item 19 with only a certain sampling of their stores. Statistical data can be manipulated by using a biased sample, for example, if the franchisor only surveyed their older, more established stores, the sales numbers might be biased upwards. Take the kind of sample the franchisor used into account when making your decision about whether or not this franchise is the right opportunity for you.
Getting an FDD with an Item 19 can provide a realistic picture of both the possible profitability of the franchise opportunity and the credibility of the franchisor you are considering doing business with. Take care not to underestimate the importance of this section of the FDD.
Filed under: Buying a franchise, Franchise Advice, Franchise Articles
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