What is Item 19 and Why You Should Understand It
By: Mike Minitelli
In franchising, there’s a document that holds tremendous significance, and it goes by the name “Item 19.” If you’re a prospective franchisee or even a seasoned entrepreneur considering a franchise opportunity, understanding Item 19 is not just a good idea—it’s essential. But what exactly is Item 19, and why is it such a big deal?
The Importance of Item 19
Item 19, also known as the “Financial Performance Representation,” is a section of a franchisor’s Franchise Disclosure Document (FDD) where a franchise will provide detailed financial information about their franchise system. It’s essentially a window into the financial health and potential of the franchise opportunity you’re considering. Understanding Item 19 is crucial for several reasons.
Firstly, it gives you a glimpse of the franchise’s financial track record. By examining historical data, you can assess whether the franchise has a history of profitability. This information is invaluable in helping you make an informed decision about whether the business is financially viable.
Secondly, Item 19 allows you to benchmark your expectations. It provides you with a realistic picture of what you can expect in terms of revenue, expenses, and profits. This data empowers you to set realistic financial goals and create a business plan tailored to your specific circumstances.
Item 19’s Legal Requirements
Now, let’s talk about the legal side of Item 19. Franchisors are not legally required to include Item 19 in their FDDs. However, if they do choose to provide financial performance representations, they must adhere to strict guidelines set forth by the Federal Trade Commission (FTC). Under FTC rules, no information about the financial performance of a franchise that meets the definition of a Financial Performance Representation can be given to franchisees unless it is listed in Item 19.
These guidelines ensure that the information presented in Item 19 is accurate and not misleading. Franchisors must use reasonable and substantiated data, and they are prohibited from making unsupported earnings claims. This legal framework exists to protect prospective franchisees from deceptive practices and to maintain the integrity of the franchising industry.
What You Should Look for in Item 19
There are several crucial aspects to keep a sharp eye on when it comes to reading through your next FDD. First and foremost, pay close attention to the time period covered by the financial data. A comprehensive and meaningful Item 19 should typically provide at least three years’ worth of financial information. This extended time frame allows you to assess the franchise’s financial stability and performance trends over a reasonable duration.
Additionally, consistency is key. In a strong franchise system, you should observe steady or improving financial performance over time. If you encounter significant fluctuations or a consistent decline in the numbers, it’s essential to investigate further and understand the underlying reasons for such variations.
Furthermore, don’t neglect the importance of footnotes and explanations accompanying the financial data. These annotations can provide crucial context and insights into the factors influencing the numbers presented. They might clarify unusual spikes or declines and offer a more comprehensive understanding of the franchise’s financial picture. Lastly, ensure that the information presented in Item 19 aligns with the overall content of the FDD. Any disparities or inconsistencies should be thoroughly examined, as they could signal potential issues or inaccuracies that merit further scrutiny. By vigilantly evaluating these aspects within Item 19, you’ll be better equipped to make informed decisions about the franchise opportunity you’re considering.
How Benetrends Helps Franchise Owners
Benetrends is not just a lending company, we are a dedicated partner for franchise owners on their journey to success. We understand the unique financial challenges that come with franchising, like grasping the ins and outs of the FDD, and we are here to provide tailored solutions that help you achieve your business goals. Our commitment to franchise owners goes beyond just providing loans, it’s about empowering entrepreneurs to thrive.
We understand that the challenges of running a franchise don’t end with securing funding. That’s why we offer comprehensive resources and assistance to help franchise owners navigate the complexities of entrepreneurship. From compliance with legal and regulatory requirements to business planning and growth strategies, Benetrends is your trusted partner every step of the way. Our mission is to ensure that franchise owners have the financial backing and expertise they need to build lucrative businesses.
If you’re looking for lending solutions to fuel your business aspirations, Benetrends wants to help! Start a conversation with us by filling out our form here. We look forward to learning more about your business goals and how we can help achieve them!