Why Don’t More Franchisors Disclose Franchisee Results?
by Ed Teixeira
An Item 19 disclosure is an optional franchisor disclosure made in the
Franchise Disclosure Document (“FDD”). It presents the financial performance of
the franchisor affiliates, franchisees and company-owned units. It’s been
reported that 25-40% of franchisors make a disclosure under Item 19. Based upon
various discussions with industry experts I will err on the conservative side
and say it’s probably around 30%.
There are numerous reasons why more franchisors don’t provide an Item 19
- Difficulty in obtaining consistent and credible data from
the franchisees. The fear that some data is not accurate.
- Complexity of gathering, verifying and presenting the data
especially on the part of large franchise systems.
- Disclosing financial data that can be viewed by competitors.
- Mixed financial results, whereby some franchisees perform
- Reluctance to project future financial performance to
- Impacting the due diligence process of prospective
franchisees, whereby some could be swayed by the disclosure when
making a decision to purchase the franchise.
I expect these reasons will continue to play a role in the decision not to
make an Item 19 disclosure.
Franchisor benefits from an Item 19 disclosure:
- Can provide credible financial data to franchise prospects
(providing it’s verified).
- Sets the franchisor apart from those franchisors that fail
to make this disclosure.
- Can accelerate the franchise prospects due diligence
- Forces the franchisor to gather franchisee financial results
and thus better monitor the network.
- Can boost the sale of new franchises.
- Can be used by the franchise prospect to conduct a more
thorough financial analysis.
Despite these benefits, the fact remains that the majority of franchisors
will most likely refrain from making a disclosure under Item 19. Some franchise
attorneys believe that more franchisors will make a financial disclosure as they
seek to sell more franchises. They may believe that an Item 19 disclosure can be
an advantage to their development staff in the sale of new franchises.
There are some who feel that an Item 19 disclosure should be mandatory for
franchisors based upon certain qualifying factors such as size and tenure as a
franchisor. Although a case could be made for mandatory disclosure the fact
remains that the requirements necessary to regulate and audit compliance would
be an unlikely position for the FTC or other regulators to take. Then again, is
it truly necessary? There are options that enable a franchisor to provide
important financial data to prospects.
Under the amended FTC Rule franchisors can provide prospective franchisees
operating cost estimates, such as for labor, ingredients and products, so long
as this information is not presented as a percentage of gross revenues. If it is
then an Item 19 disclosure must be made. Additionally, a franchisor can provide
the prospective franchisee with a price list for its product line. If the
franchisor does provide prospective franchisees with cost and expense
information, the information must be consistent with the information contained
in Items 5, 6, and 7 of its FDD. Cost information in combination with additional
FDD disclosures can enable a franchise candidate to construct financial
In addition, a franchisor can make an Item 19 disclosure for revenue only. By
providing revenue figures a prospective franchisee has a basis to develop a
break even and cash flow projection. Some franchisors list franchisee revenue
without identifying the franchisee by name or location. This is a rather simple
process that a franchisor can follow.
When a franchisor refuses to provide the most basic financial information to
prospective franchisees some consider this to be a red flag. It creates the
perception of negative financial results from their franchise network.
Vincent DeBiase, a franchise attorney with
Corbally, Gartland & Rappleyea, LLP says: “When I'm representing a
potential franchisee, unless the franchise being considered is a relatively new
concept or has few franchisees, I have a bias against franchisors that don't
make Item 19 disclosures. On the other hand, when I'm representing a
franchisor, I caution them to avoid Item 19 disclosures unless they feel
absolutely confident that there is a reasonable basis for the representations
they are making and they have the data on hand to back those representations
I would suggest that this response mirror’s what most franchise attorneys
would say depending upon the client they represent.
Jeff Connally, President and CEO of
CMIT Solutions states: “CMIT does provide financial performance data
in Item 19 and has for several years. We provide the cost and current retail
value of our flagship service offerings thereby giving the franchise candidate
the basic “unit economics” upon which to build their business plan. During the
discovery process the franchise candidate is able to confirm their assumptions
(regarding rate of client acquisition & other business model assumptions) with
our existing franchise partners.
We believe that this approach to financial disclosure engages the potential
franchise owner in the development of a realistic business plan, and avoids the
potential for miss-understandings”
Whether franchisors should make a disclosure under Item 19 will continue to
be a controversial topic, based upon which side one represents. Recent changes
to the Franchise Rule have made it easier for franchisors to present cost data
without being accused of making an “Earnings Claim.” On the other hand,
presenting franchisee revenue under Item 19 can be useful to prospective
These two items would provide important information to franchise prospects
and add credibility to the franchisor.
© 2010 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He
can be reached at