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 potential franchisee regarding the revenue or profits of the franchised business. Here is what you need to know about item 19 in FDD.
Why Item 19 is Important
Accurate representation of your franchised business in your Item 19 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 your outlets’ historical or projected performance.
What is an Item 19?
Formerly known as the “earnings claims” and renamed in 2007 as a financial performance representation or “FPR.” Item 19 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; this will be the first stepping stone of positive communication between you.
What Does 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 in FDD can show the elements of your business that complete the financial picture, like average net profit, the average cost of goods, and the average revenue reported by your company-owned outlets or franchisees.
Your Item 19 FDD paperwork could be a profit and loss statement for individual outlets, a chart, or anything in between, as long as it paints an accurate picture and complies with applicable franchise laws and regulations.
What Does Item 19 Do?
When you sell your franchise, you will give your Franchise Disclosure Document to your potential buyer so that they know essential information regarding your business. 23 items in the FDD are necessary for any prospective buyer to understand. But the most important of all is Item 19. It provides an overview to potential buyers of the possible earnings if they buy into your franchise. And because it is the first communication the two of you have regarding the financial performance of your franchise, it must tell the whole story.
How Can Item 19 Affect The Buyer?
Before signing on with your franchise, prospective buyers should understand what they are getting into. 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 they can make an informed decision about purchasing your franchise.
Conclusion
There is no expectation that your FPR shows perfect profit margins or that all units in your franchise system will perform well. 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 to get the best possible franchisees on board with your business. Ultimately, that will be the best for all of you in the long run.
Hire Drumm Law to Help You With Item 19 FDD Questions
Drumm Law is a virtual law firm. Unlike our competitors, we do not have an expensive downtown office and the overhead that comes along with it. We call, email, text, Skype, chat, “goto,” webinar, Facebook, Linkedin, meet, tweet, and greet our clients. We have attorneys throughout the country. While we have conference rooms available when needed, we prefer to meet our clients over lunch or drinks. Contact us to book a consultation!