Item 19, also known as Financial Performance Representations, is a section of the Franchise Disclosure Document (FDD) for franchisors to disclose information about the past financial performance of their franchises.
What information is included in Item 19 in a FDD?
In Item 19, franchisors may provide information such as average revenues, gross profits, and other financial metrics of their franchised businesses.
However, it’s important to note that franchisors are not required to include an Item 19 disclosure in their FDD. In other words, it can be left blank. Also, there are no specific guidelines as to what information must be included in this section.
For example, some franchisors decide not to include any information whatsoever (for confidentiality). Instead, other franchisors provide a lot of insightful information (from revenues to costs and profits for example).
Average Unit Volume (Revenue per Unit)
The vast majority of Franchise Disclosure Documents that include some financial data in Item 19 only provide revenue information.
Most of these franchises provide what we call the average revenue per unit. This is also referred to as “Average Unit Volume”) for their franchises.
By providing historical revenue data, franchisors sometimes provide some form of breakdown. For example, in its 2022 FDD Baskin Robbins provides a breakdown of restaurants per geographic area and their respective average (and median) revenue per unit.
Another common example is the breakdown of restaurants by tercile or quartile. For example, Baskin Robbins splits 884 restaurants by quartile: the top 25% to the bottom 25% in 4 different tiers.
Often franchisors provides ranges (the lower and highest revenue per unit for each category).
Costs & Profits
Although more rare, it’s not uncommon to see some franchisors provide more details in addition to revenue per unit. For example, some franchisors provide a simplified profit and loss (P&L) for their franchises.
This is the most detailed type of Item 19. Franchisees are presented either with:
- Some basic cost information, staff costs as percentage of revenue for example (common); or
- Very detailed information such as a profit and loss from revenue down to EBITDA (more rare).
Baskin Robbins is a good example of the franchisor that decides to disclose some limited cost information only. As you can see below, they provide Cost of Goods Sold (COGS) and Labor costs as a percentage of revenue.
Is the information in Item 19 accurate?
It’s important to note that the information franchisors provide in Item 19 often (if not always) has not been audited. As such, it may not be fully accurate. Yet, it’s still pretty much a very good basis for understanding the financial performance and profitability of a franchise.
In addition, you should be aware that almost all franchisors do not provide a representation of all their franchises. Instead they choose to make representations on the basis of a group of franchises they choose to analyse or present the data for a variety of reasons. It can be because:
- Some franchises financial performance are not representative of the normal course of business. This is especially true for most businesses in the food & beverage industry during the pandemic for example. Indeed, most haven’t been operating throughout 2020 and 2021 and, as such, their performance isn’t as good as what it could have been without the impact of the COVID-19 pandemic.
- Some franchises may not have been able to provide the data to the franchisor. This can be due to a number of reasons: lack of reporting tools, missed the deadline, etc.
In any case, franchisors are required to support in the Franchise Disclosure Document the basis for their representations. They do so in footnotes, notes or even as the introduction to Item 19.
Therefore, you should be careful and read between the lines to understand whether, for example, the revenue per unit data you’ve been provided is representative of all franchises or only a small, high-performing subset.
Is the information only from franchised-owned units?
Often, franchisors decide to provide financial information in Item 19 from company-owned units instead of franchised-owned units.
Usually, this is simply due to the fact that the franchisor doesn’t have the data available for the franchised units. Indeed, franchised units are not necessarily required to provide detailed financial reporting to the franchisor.
That’s why franchisors often provide costs and profit information from company-owned units instead.
Therefore, it’s very important for franchisees to know where the information comes from. Indeed, company-owned units often do not give a good representation of how a franchise should perform. A good example of this is royalties: franchises must pay royalty fees to the franchisor that company-owned units do not.
Therefore, one can argue that the profit margin of a company-owned unit isn’t relevant to forecast a franchised-owned unit profitability. Instead, you should make adjustments, as we do in our analyses.