What the federal rule requires
16 CFR 436.5(s) governs financial performance representations in the FDD. A franchisor may state that it does not make one. If it does make one, the disclosure must have a reasonable basis and written substantiation, include prescribed explanatory information, describe material bases and assumptions, and state that substantiation will be made available on reasonable request.
The rule also addresses outlets included in historical representations and permits certain supplemental information subject to conditions. Read the complete current subsection rather than relying on an earnings headline.
Item 19 is evidence, not a projection
Extract each representation exactly:
| Field | What to record |
|---|---|
| Metric | Gross sales, net sales, gross margin, profit, cost, transactions, or another measure |
| Population | Franchised, company-owned, geography, format, age, open/closed status |
| Period | Calendar or fiscal dates and length of operating history |
| Statistic | Mean, median, range, quartile, percentage meeting a threshold, or individual examples |
| Exclusions | Closures, transfers, remodels, nontraditional sites, incomplete records, or other omitted outlets |
| Assumptions | Owner involvement, hours, pricing, staffing, occupancy, financing, and ramp-up |
| Substantiation | Data source, sample size, calculation method, and material limitations |
Do not label one presentation "honest" and another "useless" without examining its purpose and basis. An average and a median answer different questions. Revenue, gross profit, and net income are different measures. An outlet-level result is not the buyer's forecast.
Reconcile Item 19 with the FDD
Compare the population and dates with Item 20 openings, closures, transfers, and contacts. Reconcile required fees and operating obligations with Items 5, 6, 7, 8, 11, and 12. Review audited financial statements in Item 21 and the contracts in Item 22. Record every mismatch for the franchisor and counsel.
Call a broad selection of current and former franchisees from Item 20. Ask about ramp time, pricing, discounts, labor, occupancy, required purchases, marketing, owner hours, closures, transfers, and whether their records match the disclosed metric. Individual calls provide context, not a statistically representative forecast unless the sampling supports one.
Questions to send in writing
- Please provide the written substantiation required by Item 19.
- Which outlets were included and excluded, and why?
- How were closures, transfers, partial years, and nontraditional locations treated?
- What costs are absent from a revenue or gross-profit representation?
- Have the method, system, pricing, or outlet population changed since the measured period?
- May the buyer share the substantiation with advisers and a lender?
Inkvex can quote Item 19, map it to other FDD items, and organize questions in a first-pass for your franchise attorney. It does not validate the franchisor's source data or forecast profitability.
Inkvex provides legal information, not legal, financial, or investment advice. Review the current FDD, substantiation, franchisee evidence, and buyer-specific model with qualified advisers.
Turn Item 19 into an evidence table
For each number you may use, record the exact statement, unit population, period, geography, ownership type, inclusion and exclusion rules, and whether it is an average, median, range, or count. Keep franchised and company-owned outlets separate when the FDD does. If the presentation covers a subset, calculate the represented share only from the disclosed population and do not silently treat it as the whole system.
Then reconcile Item 19 with Item 7 investment, Item 6 fees, Item 20 openings and closures, audited financial statements, territory terms, and the franchise agreement. A revenue figure is not profit, cash flow, or debt-service capacity. Build the buyer's model with independently verified local rent, labor, financing, tax, and operating assumptions.
Questions for validation calls
Ask franchisees how their outlet compares with the disclosed population, which costs changed after opening, how long ramp-up took in their circumstances, and which assumptions they would revise. Preserve notes and distinguish personal experience from system-wide evidence. The FTC rule permits an Item 19 representation when the franchisor has a reasonable basis and written substantiation; it does not guarantee the buyer will achieve the result.
Where this page fits
Use the primary hub for the main workflow, then check the supporting pages that belong to the same diligence lane.
Go deeper
Read the guide, then move into the real workflow, pricing, audience page, and glossary that support the next decision.
Got a contract to review?
Upload it for a first-pass contract review. The normal processing target is under 3 minutes. Large, scanned, or unusually dense files can take longer. Free Trial available.
Related Articles
This article is for informational purposes only and does not constitute legal advice. For high-stakes agreements, consult a qualified attorney.