How to Read Franchise Item 19
The most important section in the FDD — and the most frequently misread.
Why Item 19 Is the Only Number That Matters
Most FDD sections tell you what you'll pay the franchisor. Item 19 is the only section that shows you what you might earn. Everything else in due diligence is about protecting the downside; Item 19 is the one data point that helps you assess whether there's a viable upside.
But Item 19 is also the most frequently misread section in the FDD — and franchise development teams know it. The way revenue data is presented, the outlets included or excluded, the use of averages versus medians, and the difference between gross revenue and net profit all change what the number actually tells you. Here's how to read it correctly.
Step 1: Find What's Actually Being Disclosed
Before looking at any revenue number, identify exactly what's being measured. Item 19 can legally disclose a range of different metrics — and the format varies significantly between brands:
- Gross revenue / total sales — the top-line number before any expenses
- Average unit volume (AUV) — same as gross revenue, different terminology
- Net revenue — sometimes excludes specific revenue streams (catering, wholesale)
- Adjusted gross revenue — may exclude royalties or specific expense categories
- Gross profit / EBITDA — rare but the most useful metric for profitability
- Projections only — estimated future performance rather than actual results (avoid)
Real example — Nothing Bundt Cakes: Their FDD discloses both gross revenue (average $1,480,010; median $1,354,939 across 459 bakeries) and adjusted EBITDA. That's unusually transparent. Most brands disclose gross revenue only — you still need to model rent, labor, royalties, and COGS to estimate actual profitability.
Step 2: Check the Sample Size Against the Total System
Item 19 shows how many outlets were included in the calculation. Cross-reference this against Item 20, which shows the total number of franchised and company-owned units.
| Disclosed vs. Total | What It Means |
|---|---|
| 90%+ disclosed | High confidence — represents the full system |
| 60–89% disclosed | Acceptable — ask what drives the exclusions |
| 30–59% disclosed | Caution — excluded outlets may be lower performers |
| <30% disclosed | Red flag — data is likely cherry-picked |
Step 3: Average vs. Median — Use Median When Available
In most franchise systems, a minority of high-volume locations pulls the average up significantly above what a typical location earns. Median revenue — the point where half earn more and half earn less — is a better baseline for modeling your own performance.
When the gap is large: A system with average revenue of $900K and median revenue of $620K has a 45% gap between mean and median. This indicates high variance — some locations are very successful, but many are earning substantially less than the headline number suggests. Model your projections from the median, not the average.
If a franchise only discloses average revenue (no median), ask the franchise development team directly during validation: "What percentage of your franchisees earn above the disclosed average?" Federal law requires them to answer honestly if you ask in writing.
Step 4: Apply the Item 20 Closure Rate Adjustment
Item 19 only captures franchisees still operating when the FDD was filed. Units that closed before filing — because they were unprofitable — are excluded from the calculation. This is the survivor bias problem.
From Item 20, calculate the system's annual exit rate (terminations + non-renewals + transfers as a percentage of total units). Then apply this adjustment to the disclosed average:
- Annual exit rate 1–4%: minimal adjustment, system is stable
- Annual exit rate 5–9%: multiply disclosed average by 0.93 for a conservative estimate
- Annual exit rate 10%+: multiply by 0.87 — high churn means many underperformers have already exited
Example: A system discloses average revenue of $950,000 with a 12% annual exit rate from Item 20. Adjusted estimate: $950,000 × 0.87 = $826,500. That's still a strong number, but 13% lower than the headline figure — a meaningful difference for a capital-intensive investment.
Step 5: From Revenue to Profit — Build the Full P&L
Item 19 shows revenue. Profit requires modeling. A typical franchise P&L (using QSR as an example at $1M AUV):
| Line Item | % of Revenue | $ at $1M AUV |
|---|---|---|
| Gross Revenue | 100% | $1,000,000 |
| Cost of Goods Sold | 28–35% | –$315,000 |
| Labor | 25–32% | –$285,000 |
| Rent | 8–12% | –$100,000 |
| Royalty + Ad Fund (Items 5–6) | 8–13% | –$100,000 |
| Other operating (insurance, supplies, utilities) | 6–10% | –$80,000 |
| Operating Profit | 5–15% | $120,000 |
QSR example. Margins vary significantly by category. Service franchises (cleaning, restoration) typically earn 15–25% operating margins; food franchises 5–15%.
4 Item 19 Red Flags
- Projection-only disclosure. "Based on our projections, franchisees will earn..." is not historical data. It's a forecast with no legal requirement to be accurate. Walk away or treat the projection as a best-case ceiling, not an expectation.
- Less than 50 disclosed outlets. Small samples can reflect cherry-picked high performers. Ask why the sample is small — and whether excluded outlets underperformed.
- No year-over-year data. A single year of data doesn't show trends. A system disclosing 3 years of declining AUVs is a very different investment than one showing 3 years of growth.
- Mixed format data. If a QSR brand includes airport kiosks, toll plaza locations, and traditional stores in one Item 19 average, you can't tell what a traditional store earns. Always ask how the sample is segmented.
Item 19 "Average" Revenue Is the Most Misleading Number in Franchising
Every Item 19 headline figure is an average — and averages in franchise systems are almost always pulled upward by a small number of high-performing legacy locations. A system with 500 units where the top 50 generate $2M+ and the remaining 450 average $600K will report an "average" of $740K. A new franchisee reading that average allocates capital, signs a lease, and plans operations for $740K in revenue — but has a 90% chance of landing in the $600K cohort. The fix is to demand the distribution data behind the average. Item 19 disclosures that show percentile breakdowns (25th, 50th, 75th) are far more honest: if the median is $580K but the average is $740K, the distribution is right-skewed and the average overstates what a typical unit produces. For systems that only report the average, calculate the gap between average and what franchisees tell you during validation calls. If 7 out of 10 franchisees you call report revenue below the Item 19 average, the average is misleading — use 80% of the stated figure as your planning number. At minimum, never model debt service or lease obligations against the Item 19 average. Use 70-80% of the average for conservative planning and 60% for stress testing.
Gross Revenue Versus Net Revenue in Item 19: The Distinction That Changes Everything
Some franchisors report gross revenue (total sales before any deductions) while others report net revenue (after deducting discounts, comps, and third-party delivery commissions). The difference can be 10-20% — a QSR brand reporting $1.2M gross revenue at a location where 25% of sales come through DoorDash at 25% commission has effective net revenue of $1.14M ($1.2M minus $60K in delivery commissions on $240K delivery sales). But the royalty is calculated on gross: 6% of $1.2M = $72K, not 6% of $1.14M. This means the effective royalty rate on net revenue is 6.3%, not 6%. The Item 19 disclosure format (gross vs net) directly affects how you should model profitability. Check the footnotes for which definition the franchisor uses — it's typically stated in a paragraph that most readers skip. If the disclosure is gross, subtract delivery commissions (ask the franchisor for the system-wide delivery mix percentage), discount programs (some systems run 5-10% of revenue through promotional pricing), and comps/waste (typically 1-2% of gross). These deductions turn a headline $1M gross revenue into $850K-$900K in actual collected revenue — and that's the number your P&L starts from.