Every component of a franchise contract is important. However, there are some portions of the franchise disclosure document that seem to be more valuable to understand than others. For example, Item 19 of the franchise disclosure document is one of the most important, and most complex, sections. It is essential for anyone entering a franchise agreement to understand, though. So what is this elusive Item 19 and what does it mean to you?
Breaking Down Item 19
Item 19 is a term you may hear referred to from time to time. It is often discussed because it has long been one of the most important parts of the franchise disclosure document. This is the part of the disclosure that discusses how much the franchisees have made in the system, or a forecast of the potential a franchisee can make.
Due to the nature of Item 19, it’s not hard to see why it’s the most commonly asked about item of any document related to franchise law. It was first used in the Uniform Franchise Offering Circular when that was developed in the 1970s. In its original form, it was the Earnings Claims section of this original contract. Now, Item 19 is known as the Financial Performance Representation in the Franchise Disclosure Document.
By definition under the Amended FTC Rule, financial performance representation is any type of representation to a prospective franchisee that will state the specific level or the specific range of the actual or the potential sales of the franchisee, which may also include gross profits, net profits and other income.
What Does Item 19 State?
As you consider any franchise agreement, you’ll want to pay close attention to the terms outlined in Item 19. It will discuss the most important factors most franchisees want to know about income. In short, it will inform you of the current financial performance of the existing franchise’s units. It may also provide information about how the franchise will perform going forward.
It is important to know, however, that this component does not provide actual performance information about the existing business that will be sold to you as the franchisee. It only provides prospective information, not about a particular location.
As an investor, it is up to you to ensure that the information contained here is as thorough as you would like it. You do not want just basic industry information, you want as much detail as possible so that you can make the right decision about whether you should invest in the franchise. However, franchisors have the option to make no financial performance representations, too. When they make that choice, two standard paragraphs are inserted and are of no help to the prospective franchisee.
Get Help From an Attorney
Franchise law is complex; Item 19 shows this. However, when you work closely with the team of attorneys at Sheltonpower & Associates, you can gain the insight and information you need to ensure you make the right decision about investing. Let our team help you to understand this disclosure document and other aspects of franchise law as it relates to you, the franchisee.