Item 19 and Item 20: building a unit-economics model from the two FDD pages that allow it

Every unit-economics model for a franchise starts from the same problem: the franchisor is not required to tell you what a store earns. Understanding exactly where that line sits is what makes the model honest. This worksheet is built on the United States Franchise Rule, 16 CFR Part 436, because it is the most explicit public rulebook on the subject. The principle transfers even where the local regime differs, but the specific obligations do not.

Step one, establish whether there is an Item 19 at all

FTC guidance for prospective franchisees is direct on this: any sales, income or profit claim belongs in Item 19 of the Franchise Disclosure Document, and a claim made outside Item 19 is generally not allowed. Two exceptions are named, the records of a specific outlet you are considering, and added information about particular locations or circumstances.

So the first line of the worksheet is a yes or no. If Item 19 is empty, the model has no franchisor-supplied revenue input and you are building it from your own research. That is a legitimate position for a franchisor to take. What is not legitimate is a verbal figure that does not appear in the document, and FTC guidance tells candidates to keep their own written record of any earnings representation made to them, because a questionnaire they sign may waive the right to contest it later.

Step two, read Item 19 for what kind of number it is

The FTC amended Franchise Rule FAQs state that any financial performance representation must have a reasonable basis. The FAQs also address affiliate data: where the franchisor has adequate operating data of its own, relying on affiliate results is generally not reasonable, and affiliate data may be used only in narrow circumstances such as a lack of operating experience, with material differences disclosed.

That gives the worksheet three questions. Is the figure gross sales or net profit. Does it come from franchised outlets or company-owned ones. And what subset of the system does it cover. FTC consumer guidance warns on each: averages can be inflated by a few very successful franchisees, gross sales do not reflect costs so a high-revenue outlet can still lose money, and net profit figures may come from company-owned outlets, which often carry lower costs than a franchisee would.

Step three, use Item 20 as the survival curve

FTC guidance describes Item 20 as the charts showing system growth and owner turnover, and advises that many closures or transfers in your area may signal weak support or unprofitable outlets. It also tells candidates to contact current and former franchisees listed there, including some open about a year and some open about five, and to ask whether they made a profit.

In modelling terms, Item 20 is the closest thing in the document to a survival curve. Transfers and terminations by year, read against openings by year, give a rough attrition rate. If Item 19 shows an attractive average while Item 20 shows heavy turnover, the two are describing different populations, and the average is being computed on the survivors.

Step four, price the things Item 19 never includes

FTC guidance locates costs in Items 5 to 7, which cover initial and ongoing costs including franchise fees, royalties and advertising fees, with some fees non-refundable. Items 8 and 12 cover required suppliers, sales territory and customer limits including internet sales. Item 11 covers advertising and training, Item 17 renewal, termination, transfer and disputes, and Item 21 audited financial statements.

The modelling consequence is that a required-supplier clause in Item 8 and a territory limit in Item 12 are cost and revenue inputs as much as the royalty rate is. A model that uses the royalty but ignores mandated purchasing is not a model of the deal on offer.

Step five, build in the time the document does not give you

FTC guidance notes that starting a business often takes a long time to break even and that some franchisees never do. Nothing in the disclosure document is obliged to tell you the ramp. So the worksheet needs a ramp assumption you have sourced yourself, from franchisee interviews under Item 20, and it needs to be labelled as an assumption rather than a disclosure.

Two procedural points support all of this. FTC guidance states the document must reach you at least 14 days before you sign anything or pay anything, with updates before signing. And candidates may request written substantiation for any earnings claim, which the franchisor must provide.

What we do not know

We do not know what any specific system earns, and this worksheet cannot supply that. The rules cited here are United States federal requirements, and franchise disclosure obligations elsewhere differ in scope and in what must be disclosed at all. FTC staff guidance in the FAQs is described as non-binding staff opinion rather than Commission-approved policy, so it should be verified against the current rule and applicable state requirements. And nothing in a disclosure document predicts performance at a specific site, because site quality, local competition and operator skill sit outside the document entirely.

This is general information, not legal, financial or investment advice. A franchise agreement and its financial statements should be reviewed by a qualified lawyer and accountant in the relevant jurisdiction.