US Franchise Earnings Claims: How to Check FDD Item 19

An attractive sales figure can make a franchise look affordable before you understand what the owner actually earns. When buying into the United States franchise community, checking earnings claims is a distinct due diligence task. Your aim is not simply to find a promising number: it is to establish what that number measures, whose results it represents and whether it supports your own financial plan.

1. Know where earnings claims belong

The Federal Trade Commission’s Franchise Rule governs pre-sale disclosure for covered franchise offers in the United States. It generally requires you to receive a Franchise Disclosure Document (FDD) at least 14 calendar days before signing a binding agreement with, or paying money to, the franchisor or its affiliate in connection with the proposed franchise sale.

Item 19 is the FDD section for financial performance representations: claims about actual or potential sales, income or profits. A franchisor does not have to provide such a representation. However, if it chooses to make one, it generally must include it in Item 19, have a reasonable basis for it and hold written substantiation. Limited exceptions exist, including providing actual records for an existing outlet you are considering buying.

Ask for the written substantiation supporting any Item 19 representation. The disclosure should explain that this is available on reasonable request.

State law can add registration, disclosure and anti-fraud protections. New York, for example, generally requires franchise registration unless an exemption applies, and has a pre-sale disclosure requirement of at least 10 business days. Have a US franchise solicitor check the applicable federal and state deadlines rather than assuming one replaces the other. Registration is not a government endorsement of earnings potential.

2. Find out what the figures actually measure

Start with the definitions and footnotes, not the headline. Gross sales are not owner income. A high-revenue outlet can still struggle after paying wages, rent, supplies, royalties and loan repayments.

For every figure, establish:

• The measure: Is it gross revenue, gross profit, operating profit or another calculation?
• The population: Does it cover franchised outlets, company-owned outlets or both?
• The period: Is it a full trading year, a shorter period or an annualised estimate?
• The exclusions: Are new, closed, transferred or otherwise underperforming outlets omitted?
• The distribution: Is the headline an average, a median or the result of a selected group?

An average can be lifted by a small number of exceptionally successful outlets. Look for how many outlets achieved or exceeded the stated result and how widely performance varied.

Check whether the figures include an owner’s salary or a market-rate manager’s wage. If neither is deducted, the apparent profit may partly represent payment for your own full-time work rather than a return on your investment.

3. Test whether the sample resembles your business

Reliable historical figures can still be a poor guide to your proposed operation. An established outlet with repeat customers is not equivalent to a new opening. Company-owned locations may have different costs, staffing arrangements or purchasing advantages.

Compare the represented outlets with your plans for premises, opening hours, local wages, customer demand and owner involvement. Ask the franchisor to explain material differences, without treating an explanation as a guarantee.

Use the current and former franchisee contact information disclosed in Item 20 to investigate independently. Do not rely solely on introductions to selected successful owners.

Useful questions include:

• How long did it take to cover routine operating expenses?
• Which costs were higher than expected?
• How many hours did the owner work, and was that work paid?
• Did additional cash injections become necessary after opening?
• How closely did the disclosed performance information match their experience?

Franchisees may reasonably decline to share confidential accounts. Record the limitations of what you learn and look for patterns across several conversations rather than treating one owner’s experience as representative.

4. Turn the evidence into a cautious cash-flow forecast

Work with an accountant to build a monthly forecast using your own defensible assumptions. Cross-check Item 19 against initial investment estimates in Item 7 and fees in Items 5 and 6. Obtain local quotations for major expenses wherever possible.

Include payroll, occupancy costs, insurance, supplies, royalties, advertising contributions, technology charges, maintenance and professional fees. Model loan repayments and tax cash requirements separately from accounting profit. Allow for your household living costs without counting the same owner remuneration twice.

Prepare a downside case with slower sales growth, an opening delay and higher operating costs. Calculate the cash reserve needed before the business can support itself and you. A lender’s willingness to finance the purchase does not validate an earnings forecast.

If a salesperson offers figures outside Item 19, preserve the email, presentation or notes and ask for a written explanation. Do not let an unsupported spreadsheet become the foundation of your borrowing decision. Seek legal advice before proceeding if the disclosure and sales pitch conflict.

Practical takeaway: Buy on evidence, not a headline. Understand the earnings measure, test the sample, verify costs independently and proceed only when a cautious cash-flow forecast supports the commitment.