If you are looking for a one word answer, then it is YES. You should have a Financial Performance Representation, or Item 19, in your Franchise Disclosure Document. The FPR is the first step in the communication process between you and your possible franchisee regarding the revenue or profits of the franchised business. Having an accurate representation of your franchised business in your FDD is vital if you want to build a positive relationship with prospective franchisees and attract the right kind of franchisee. Additionally, without an FPR, you are not permitted to discuss any earnings claims or related details on the historical or projected performance of your outlets.

What is an Item 19?
Formerly known as the “earnings claims” and renamed in 2007 as a financial performance representation or “FPR”, the FPR can is the financial picture of your franchised business: the good, the bad, and the ugly. Painting an accurate picture for your possible buyer is essential, and this will be the first stepping stone of positive communication between you.

What does and Item 19 look like?
Your FPR can take many forms and is as individualized as you are. At Drumm Law, we can help you find the format that best suits the telling of your story. Item 19 can show the elements of your business that complete the financial picture, like average net profit, average cost of goods, and the average revenue reported by your company-owned outlets or franchisees. Your Item 19 paperwork could take the form of a profit and loss statement for individual outlets, or a chart, or anything in between, as long as it paints an accurate picture and otherwise complies with applicable franchise laws and regulations.

What does an Item 19 do?
When you go to sell your franchise, you will give your Franchise Disclosure Document to your potential buyer so he or she will know essential information regarding your business. There are 23 items in the FDD that are important for any prospective buyer to understand. But the most important of all is Item 19. This provides an overview to a potential buyer of the earnings that are possible if he or she buys into your franchise. And because it is the first communication the two of you have regarding the financial performance of your franchise, it is important that it tells the whole story.

How can an Item 19 affect the buyer?
A prospective buyer needs to “get the lay of the land” and understand what they are getting into before they sign on with your franchise. Our powerful franchise team at Drumm Law can help you tell your story well so that there are no surprises down the road for your prospective buyers. A buyer needs to know if it is the kind of business where she will need to manage on location from dawn to dusk to generate a profit, or if she will only need to work a few hours a week and enjoy a nice side hustle. Then he or she can make an informed decision about purchasing your franchise.

No one expects an FPR to show perfect profit margins, or for you to have a franchise system that has no underperforming units. No one will buy your franchise thinking they will be the worst performer. Tell the story well and let Drumm Law help you with the grey areas so that you get the best possible franchisees on board with your business. Ultimately, that will be the best for all of you in the long run.