{"id":10132,"date":"2014-05-12T11:03:18","date_gmt":"2014-05-12T15:03:18","guid":{"rendered":"https:\/\/www2.franchisegator.com\/articles\/?p=10132"},"modified":"2022-08-04T17:10:19","modified_gmt":"2022-08-04T21:10:19","slug":"can-i-trust-financial-representations-item-19-2-11794","status":"publish","type":"post","link":"https:\/\/www.franchisegator.com\/articles\/can-i-trust-financial-representations-item-19-2-11794\/","title":{"rendered":"Can I Trust a Franchisor’s Financial Performance Representations (Item 19 of the FDD, Part 2)"},"content":{"rendered":"

Understanding Item 19, Part 2: The 4 Types of Item 19’s<\/h2>\n

In our previous review of Item
\n19,<\/a> we provided a general guide to items found within a company’s Item 19 Financial
\nPerformance Representation (formerly known as an Earnings Claim; also known as
\nArticle 19).  In part 2, we review how
\nthese Financial Performance Representations can be useful and their limitations.<\/p>\n

First, it is important to
\nunderstand that the FTC does not require a franchisor to share earnings
\ninformation in their Item 19 " it is an option. 
\nToday, about 50% of companies offer a Financial Performance
\nRepresentation (FPR) in their Article 19. 
\nThe rest of the franchise community does not provide any information in
\ntheir Item 19.  The primary argument for
\ninclusion is that it assists perspective franchisees gain more information
\nregarding the earning potential of the franchise system.  The primary reasons against providing a FPR
\nfall into one of three areas.  <\/p>\n

    \n
  1. Some franchise attorneys believe that an Item 19
    \nopens the franchisor to increased risk of litigation.  <\/li>\n
  2. Some franchise systems do not collect this
    \ninformation and therefore they cannot reliably share the information with
    \nprospective franchisees.<\/li>\n
  3. Some franchisors do not want to share this
    \ninformation because it is not flattering and it would not help them grow their
    \nsystem<\/li>\n<\/ol>\n

    At this point it makes sense to
    \ntake a deeper dive into the different type of FPR’s.  Over the years I have come to recognize that
    \nmost FPR’s fall into one of four categories:<\/p>\n

    Partial FPR of Actual Data<\/h3>\n

    <\/u>This is the most common type of disclosure. 
    \nMost franchisors collect top level data from their franchisees and they
    \nare comfortable with this type of disclosure. 
    \nYou can recognize this type of FPR because it normally includes Gross Sales
    \nAverages, Cost of Goods Sold, Lease Cost and\/or possible Labor Cost, but does not<\/u>
    \ninclude Earnings, Profit, or other bottom line information.  Normally this information is divided into
    \ngroups based on the age of the franchisee. 
    \nA typical breakdown could include franchisees from 12 to 24 month, 24 to
    \n36 months and franchisees in business for longer than 3 years.  This type of information can be a helpful
    \nstarting point<\/p>\n

    Complete FPR of Actual Data<\/h3>\n

    <\/strong>Although rare, some franchisors provide complete FPR’s.  This would include all of the income lines
    \nand all of the expense lines on the P&L. 
    \nThis type of FPR stands apart because the FPR will include bottom line
    \nearnings.  It is exceptionally difficult for
    \na franchisor to consolidate franchisees bottom line earnings; therefore, therefore,
    \nyou normally find this type of FPR in franchise systems that have a large
    \nnumber of company owned locations.  Since
    \nthe company owned locations are all run a consistent set of books,
    \nconsolidation can be done in a balanced and fair manner. In many ways this is
    \nthe best type of FPR.<\/p>\n

    Partial FPR of Prospective Earnings<\/h3>\n

    \nThere are also companies that provide partial disclosure of prospective
    \nearnings.  You can recognize these
    \nbecause the information will be top line and it will not<\/u> be based on
    \nactual performance.  It will be based on
    \n‘anticipated’ performance.  You can
    \nrecognize this because the FPR will state, ‘If you sell this much, then your
    \nother cost should be X.’  The fact that
    \nthis is based on an assumed sales level does not really give you any
    \ninformation regarding what is actually occurring and therefore is significantly
    \nless valuable.  <\/p>\n

    Complete FPR of Prospective Earnings<\/h3>\n

    <\/strong>The final example is a company that provides a completely assumed set of
    \nbooks.  You can recognize this because
    \nthe FPR will state, ‘Here are two or three different sales levels and the
    \nprofit you could make if you are able to make these levels of sales’.  Again, there is no connection to actual
    \nperformance and therefore the value of this type of FPR needs to be
    \nsignificantly discounted.<\/p>\n

    Don’t Rely Completely on Item 19 – Do Your Homework <\/h2>\n

    Strange as it may sound, mistakes often stem from too
    \nmuch focus on the FPR.  Even though some
    \ncompanies may provide significant financial information in their FPR, you
    \ncannot fully understand the earnings potential of a franchise system by
    \nreviewing the FPR.  It always requires
    \nin-depth conversations with franchisees following the approach found in     Chapter
    \n12 of The Educated Franchisee<\/em><\/strong><\/a>. By speaking with franchisees you can build a
    \ncomprehensive earning statement that is both accurate and educational.  The Financial Performance Representation
    \nfound in Item 19 can be an effective starting point but it is up to you to put
    \ntime and effort into discovery of the complete and actual performance.<\/p>\n

    Missed Part 1?<\/strong> Read How Much Will I Make With a Franchise, Understanding Item 19<\/em> here<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

    Understanding Item 19, Part 2: The 4 Types of Item 19’s In our previous review of Item 19, we provided a general guide to items found within a company’s Item 19 Financial Performance Representation (formerly known as an Earnings Claim; also known as Article 19).  In part 2, we review how these Financial Performance Representations … Can I Trust a Franchisor’s Financial Performance Representations (Item 19 of the FDD, Part 2)<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":10133,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[27,26],"tags":[],"class_list":["post-10132","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-editorial","category-for-starters"],"yoast_head":"\nCan I Trust a Franchisor's Financial Performance Representations (Item 19 of the FDD, Part 2) - Franchising Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.franchisegator.com\/articles\/can-i-trust-financial-representations-item-19-2-11794\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Can I Trust a Franchisor's Financial Performance Representations (Item 19 of the FDD, Part 2) - 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