51% of the franchise industry provides an Item 19 disclosure. The Real Estate Sector has the lowest occurrence of disclosure at only 24.6%.
This means that 49% of the franchise industry takes the approach of not disclosing any financial performance information in Item 19. This approach is problematic as it goes against the goal of giving a potential franchisee the ability to create a Pro Forma Income Statement and cash flow analysis. A number of franchise industry consultants advise clients to avoid investing in a system that lacks an FPR as it raises a number of questions.
Fortunately, 1,167 systems out of the 2,270 franchise systems included in this report disclose an Item 19 Financial Performance Representation (FPR).
Some sectors have a higher percentage of systems that disclose Item 19 FPR than others. For example, 65.5% of the Lodging sector make an Item 19 disclosure, while only 24.6% of the Real Estate sector do so. These two sectors also differ in the way that they disclose information. There are several financial categories that can appear in an Item 19.
The three most common financial categories used in an Item 19 disclosure are:
- System-wide Averages
- Tiers or Quartiles
- Expense Data
Of the 65.5% of the Lodging sector that discloses an Item 19 FPR, 12.5% utilize system-wide averages, 1.4% present the information in tiers or quartiles, and 4.2% disclose expense data. These percentages seem low because 83.3% of the Lodging sector uses an Industry Specific measurement, RevPar, in their disclosures.
Other financial categories that can be used in an Item 19 FPR include:
- All Outlets
- Mature Outlets
- Top Performing
- Industry Specific
- Company or Affiliate Based
- Other Metrics
This week’s Franchise Facts and Figures details these financial categories, the importance of disclosing an Item 19 FPR, FTC Compliance, Limitations, and answers the question, “What does an outstanding Item 19 look like?”