What Franchise Earnings Claims Actually Mean (And What They Don't)

Item 19 is the most important section of the FDD for your investment decision. It's also the most misread. Here's how to interpret it correctly.

There's a moment in almost every franchise sales process where someone says something like: "Our top operators are doing $1.2 million a year." It sounds like an earnings claim. It feels like an earnings claim. Legally, it might skirt just close enough to the line to avoid being one.

Item 19 of the Franchise Disclosure Document is where actual, verifiable earnings data lives. Everything else is noise.

Why Item 19 Exists (And Why It's Optional)

The FTC's Franchise Rule prohibits franchisors from making earnings representations unless those claims are substantiated and disclosed in writing. Item 19 is that written disclosure.

The remarkable thing: it's optional. Franchisors are not required to provide any earnings data at all. They can simply include a statement that they make no financial performance representations, and that's legally sufficient.

When a franchisor chooses not to provide an Item 19, there are a few possible explanations. Their unit economics may be genuinely unimpressive and they'd rather you not know. Their accounting systems may not be sophisticated enough to compile the data reliably. Or they may have taken a conservative legal position to avoid any risk of misrepresentation.

If a franchisor doesn't provide Item 19, make sure you understand why before you proceed.

The Five Forms Item 19 Takes

1. Average Unit Volume (AUV) Only

The most common and least useful form. The problem: averages are heavily skewed by outliers. If a system has 200 locations and 10 of them are doing $3 million a year, those 10 locations dramatically pull the average upward.

When you see an AUV-only Item 19, always ask: What's the median? What do the bottom quartile locations earn?

2. Quartile or Percentile Breakdowns

A more useful format. The franchisor divides their locations into groups and reports revenue figures for each band. A healthy system will show strong performance even in the lower quartiles.

3. Selected Location Subset

The franchisor reports earnings data for a subset of their locations — perhaps "company-owned locations" or "locations open for at least three years."

Always identify exactly which locations are included, and ask yourself whether that subset represents what you're actually buying.

4. Gross Revenue vs. Net Income

This distinction matters enormously. Consider a sandwich franchise reporting average unit volumes of $850,000. Now subtract royalties (6%), marketing fund (3%), food cost (28%), labor (30%), rent (8%), and other operating expenses (5%). You're left with roughly $170,000 in operating profit — on a business that may have required a $400,000+ investment to open.

When Item 19 discloses only gross revenues, you have to do this math yourself.

5. Detailed P&L Disclosures

The gold standard. A small number of franchisors provide detailed profit and loss breakdowns for all locations or a representative sample. This format allows you to build a real financial model.

The Questions You Must Ask About Any Item 19

  • How many locations are included? If the system has 800 locations and Item 19 covers 400, why are the other 400 excluded?
  • How long have the included locations been open? A system that only includes locations open for three or more years will show higher revenues.
  • What time period does the data cover? Item 19 data is often 12–18 months old by the time you're reading it.
  • Is it gross revenue or net income? If gross, you need to build your own cost model.
  • What's the range, not just the average? Averages hide variance.

Building Your Own Pro Forma

Even the best Item 19 disclosure is not a business plan.

Step 1: Start with Item 19 revenue, but be conservative. Use the median figure, not the average.

Step 2: Apply realistic cost assumptions. Call franchisees and ask what they actually spend in each category — don't use the franchisor's projections.

Step 3: Account for the ramp period. Most locations take 12–24 months to reach mature revenue levels.

Step 4: Stress test at 80% of your base revenue projection. What does the business look like if you miss your revenue target by 20%?

Step 5: Calculate your real return on investment. A franchise that generates $150,000 net on a $600,000 investment is a 25% annual ROI — quite strong. One that generates $60,000 on the same investment is a 10% ROI.

A Note on Verbal Earnings Claims

Any earnings representation that isn't in Item 19 is not a legally substantiated earnings claim. It's a sales conversation.

Write down anything said verbally about earnings. Note the date, who said it, and the specific figures or claims. If a dispute arises later, documentation matters.

FranScout evaluates Item 19 completeness and transparency as a core dimension of every franchise score. Explore our franchise reports →