You’ve finally received it: the Franchise Disclosure Document (FDD). For a prospective franchisee, this is the moment of truth. Your heart pounds a little faster as you ignore the dense legal jargon and flip straight to the back, searching for Item 19, the Financial Performance Representation. And there it is: a big, beautiful six- or seven-figure number representing the average revenue of a franchise unit. The potential for a fresh start fills your thoughts; possibilities abound, each more enticing than the last. You’re ready.
Stop. Right there.
Franchise consultants at Upside Group can tell you that this is the single most dangerous moment for an aspiring owner. Taking that number at face value without understanding what’s behind it is a colossal mistake. An Item 19 is not a promise; it’s a puzzle. Solving this is a must.
Look Beyond the Average
The first thing to understand is that “average” can be incredibly misleading. A single average revenue figure can be heavily skewed by a handful of superstar locations in prime, mature markets. It tells you nothing about the struggling franchisee in a less-than-ideal territory.
A responsible franchisor knows this. Look for brands that break down their numbers into tiers or quartiles (top 25%, middle 50%, bottom 25%). Seeing the full range of possibilities helps you pick a target you can actually reach.
Gross Sales Are Not Your Paycheck
The vast majority of earnings claims report gross sales or gross revenue. This is the total amount of money the franchise location brought in before any expenses. It is NOT profit. It doesn’t account for the biggest costs that will come directly out of that number:
- Cost of Goods Sold (COGS): The raw materials used to make your product or service.
- Labor: Your biggest and most variable expense.
- Rent: The cost of your physical location.
- Royalty and Marketing Fees: The money you owe the franchisor every month.
- Utilities, Insurance, Local Marketing, etc.
A $1 million top-line revenue can shrink to a $70,000 profit very quickly. A good Item 19 may provide some of these key expense figures, but often you have to dig for them.
Talk to the People Living the Numbers
The FDD provides you with a list of all current franchisees. You won’t find anything more useful. Item 19 gives you the franchisor’s story; the franchisees will give you the real story.
Call them. Ask them directly: “Item 19 shows an average gross revenue of X. Is that realistic for a new owner in their first few years?” and “After you pay all your expenses, including royalties and loan payments, what is a realistic take-home income?” Their answers are your reality check.
What if There’s No Item 19?
It’s not an immediate red flag if a franchisor chooses not to provide an earnings claim (it’s optional). Some new, fast-growing, or highly diverse systems don’t provide one because an “average” would be meaningless. Because of this, homework matters more now. Your entire financial validation will depend on your conversations with existing franchisees.
An earnings claim is a starting point for your investigation, not the conclusion. It’s one piece of a much larger due diligence puzzle. Making sense of an FDD is what we do. Before you bet your future on a single number, let an expert at Upside help you read between the lines and understand the full story.
