Published June 27, 2013

Item 19: Uncluttering the Debate

It’s no secret that the Item 19 is a hot-button issue in franchising. If you need proof, just Google “Do I need an Item 19?” or any other related phrase, and scroll through the pages of blog posts, forums, and other content on this topic.

One thing you’ll notice in all the chatter is that the majority of pundits lean toward the affirmative: “Yes, you do need an Item 19.” But, there is no current legal requirement to include one, and there are many arguments (most recently seen in this heated LinkedIn debate) about why it’s not absolutely necessary.

Without question, some of the opposing arguments have merit. However, some – including the following examples – are quite flawed and may only cloud the discussion:

“You don’t need an Item 19 because people still invest in brands without them.”

The statement, “You need an Item 19 to sell franchises,” is more of a prediction than a statement of fact. As many franchises do not currently disclose earnings info in their FDDs and still manage to grow, sales involve many more factors than just this one. Will it become harder as time goes on to close deals without an Item 19? It certainly looks that way.

“Item 19s have little value because each company has different data.”

If that’s the case, how do you weigh any franchise against another? Systems are all different, from the operational costs to the royalties’ structure to marketing and advertising responsibilities. Item 19s don’t need to be “apples to apples” any more than brands’ end products do.

“Item 19s can mislead the franchise candidate.”

This would happen under 2 circumstances: 1) the candidate didn’t analyze the data closely enough, or 2) the brand included “filtered” data of only a certain group of franchisees, such as those in the system 5 years or more. These notions – especially the latter – do happen. However, just like a consumer looks at the specs of any major purchase, so should the franchise candidate dig deep into what earnings data a brand presents. How does a 10-year owner’s income and profitability relate to what you would make in Year 1? Who knows? Fortunately, as an intelligent buyer, the candidate can inquire further with the brand, or simply dismiss the data if it is deemed irrelevant.

“An Item 19 is not as important as a good ‘gut feeling’ about the brand.”

There are a lot of things that are as important as or more important than an Item 19. Gut feeling? Not so much. I would suggest that those who elevate this factor have a history of good fortune in risk-taking situations. Others have not, and I don’t believe that anything about franchising gives a candidate a more accurate instinct than, say, horseracing, or buying stocks. Creating a relationship with a franchise lead is very important. Just don’t expect that the strongest candidates are going to disregard the absence of data just because the corporate staff seems like a swell group of folks.

“Any candidate who dismisses a franchise because they don’t have an Item 19 in their FDD risks missing the ‘next big thing.’”

Well, this is the truest statement of the bunch. It’s 100% accurate, in fact. No one knows which concept will take off, making its stakeholders wealthy in the process. But the same can be said for hiring an employee. “Any employer who dismisses a job candidate because they don’t have a college education risks missing the next industry star.” When was the last time you stuck a non-graduate in a Bachelor’s-or-higher role? And if you have, did it work out? If you’re among the few that answered “yes” to both, congratulations. I hope everyone else understands my analogy: Opportunity cost is often well worth the mitigation of risk.

If you’ve read this far, you’re likely looking for the end note—the definitive answer to “Should you include an Item 19?” My answer is yes, you should. Should it be as comprehensive as possible? Again, I vote affirmative. Do you absolutely need one? No, you don’t. Simple as that. Just realize that by omitting it, you will raise eyebrows and deny your prospects what could be the differentiator between your brand and another.

About the Author: Ali Forman

As the Marketing Director, Ali’s role is to educate franchise companies about and inspire them to participate in FBR’s research in order to grow and improve their brands. Ali lives in Maine with her husband and two sons.
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