US Franchise Earnings Claims: Preparing FDD Item 19

When you franchise an existing US business, prospective franchisees will naturally ask what they could earn. Your original business may be profitable, but its results are not automatically a sound basis for a sales promise. Preparing financial performance representations requires a separate decision about what you can substantiate, how you present it and who may discuss it. Getting this right supports trust across your franchise community.

1. Understand what counts as an earnings claim

The Federal Trade Commission’s Franchise Rule, at 16 CFR Part 436, regulates franchise disclosure nationwide, subject to exemptions. Item 19 of the Franchise Disclosure Document (FDD) addresses financial performance representations: statements about actual or potential sales, income, gross profits or net profits for franchised or company-owned outlets.

These representations need not be explicit profit promises. A turnover chart, a statement that operators typically recover their investment within a particular period, or a calculator populated with assumed sales can communicate financial performance. Oral statements and visual presentations matter as well as written figures.

Under the FTC Rule, you generally have a choice: make no financial performance representation, or include one in Item 19 with a reasonable basis and written substantiation. Choosing not to include a representation does not give salespeople permission to share earnings estimates informally. Narrow exceptions exist, including providing actual records for an existing outlet being offered for sale; obtain legal advice before relying on them.

State franchise registration, disclosure and anti-fraud requirements may also apply. There is no federal approval process that certifies your figures as reliable, and state registration should never be presented as government endorsement.

2. Define the evidence before choosing the headline

Start with a question your records can genuinely answer, such as: “What gross sales did our established company-owned outlets achieve during the last completed financial year?” Do not start with an attractive earnings figure and work backwards.

Create a source file containing:

• Outlet-level accounting records reconciled to the underlying sales system.
• Opening dates, ownership status and operating periods.
• Definitions of sales, refunds, discounts and any reported costs.
• Records of closures, temporary interruptions and unusual events.
• Calculations showing exactly how each reported result was produced.

For an existing business with only a small number of outlets, be clear about the limits of the sample. One successful owner-operated location may support a narrowly described historical representation, but it does not establish typical franchisee results.

Check whether the founder provides unpaid labour, owns the premises, receives unusually favourable purchasing terms or benefits from a long-established customer base. Such circumstances can make the results difficult to replicate.

If you propose adjusting historical figures to reflect franchise royalties or other charges, ask your franchise solicitor and accountant how to classify and explain the calculation. Do not label an adjusted model as actual franchisee profit.

3. Build an Item 19 that readers can interpret

A useful representation explains its boundaries rather than relying on a bold headline and small-print qualifications. Identify whether it reports historical performance or forecasts potential performance, the period covered and the outlets included.

For historical representations, the FTC Rule requires specified information about the relevant outlet population, the number included and the number and percentage that achieved or exceeded the stated result, among other disclosures. Your solicitor should determine the precise requirements for your chosen presentation.

Explain selection criteria clearly. Excluding recently opened outlets might help describe mature operations, but excluding weak performers simply because they weaken the average risks creating a misleading picture. Explain material differences between the outlets measured and the franchise being offered.

Label financial measures precisely:

• Gross sales do not show the amount an owner takes home.
• Gross profit depends on which direct costs are deducted.
• Net profit needs a clear explanation of included and excluded expenses.

Consider whether a median, range or additional breakdown would make an average easier to understand. These additions must also be substantiated and not misleading. Include the required caution that individual results may differ, and make written substantiation available to prospective franchisees upon reasonable request.

4. Control how approved figures are used

Treat the final Item 19 as a controlled publication. Keep its supporting records, calculations, legal review and approved wording together, with a named person responsible for updates.

Give employees and brokers clear instructions for responding to earnings questions. Prohibit informal spreadsheets, unsupported projections and claims that contradict or exceed the authorised representation. Review presentations, webinars and social media for implied earnings promises as well as explicit figures.

The FTC Rule requires annual FDD updating within 120 days after the financial year ends and quarterly revisions for material changes. State amendment requirements can differ. Establish a review process with your solicitor rather than assuming a previously approved claim remains suitable indefinitely.

Practical takeaway: Before discussing potential earnings, assemble the evidence, define the measure and obtain specialist review. If you cannot explain and substantiate a figure, do not use it to sell a franchise.