Understanding what the law allows and where franchisors must be careful
The Legal Framework Behind Earnings Claims
Sharing financial expectations is a natural part of discussing a business opportunity, but in franchising, it is also one of the most regulated areas of the entire sales process. Any earnings-related statement falls under Item 19 of the Franchise Disclosure Document (FDD), which governs Financial Performance Representations (FPRs).
Item 19 defines an earnings claim very broadly. A financial performance representation can be any statement that implies or suggests:
- Sales levels
- Revenue ranges
- Net profit or EBITDA
- Break-even timelines
- Income expectations
- “Success stories” tied to financial results
These can occur through:
- Sales calls
- Emails or texts
- Discovery days
- Social media posts
- Webinars or videos
- Marketing materials
If a franchisor shares any financial information, it must appear in Item 19 and be backed by verifiable data.
For franchisors evaluating whether their system can support Item 19 disclosures, tools such as a Franchise Feasibility Study can help identify financial strengths and risks early.
When Franchisors Are Allowed to Share Earnings Information
Franchisors can legally discuss earnings and profit expectations, but only when two conditions are met:
1. The financial information is disclosed in Item 19
If it is not written in the FDD, it cannot be discussed verbally or in writing anywhere else.
2. The information has a reasonable basis
This means the franchisor must have documentation that supports the data, such as:
- Historical unit performance
- POS system reports
- Franchisee financial submissions
- Market studies or economic models
- Operational benchmarks
- Consistent methodologies
Examples of financial performance disclosures that can be included in Item 19:
- Historical gross sales
- Average revenue by location type
- Median EBITDA
- Cost-of-goods percentages
- Labor percentage ranges
- Profit-and-loss summaries
For franchisors who want support in creating compliant, substantiated representations, professional guidance can help ensure accuracy.
When Franchisors Should Not Share Earnings or Profit Expectations
If a franchisor chooses not to include Item 19 in the FDD:
- They cannot share any form of earnings claim
- They cannot reference “average results”
- They cannot highlight “success stories” that imply financial performance
- Brokers and staff cannot casually discuss money
- They cannot provide “examples” or “ballpark ranges”
In this situation, the FDD must include a required disclaimer that explicitly states the franchisor does not make earnings claims.
Even well-intended comments can create legal exposure, such as:
- “Most franchisees make six figures.”
- “You should be able to pay back your investment in a year.”
- “Our top locations do over a million annually.”
Franchisors who want to strengthen their offering without violating Item 19 often start by clarifying their business model through a Franchise Growth Questionnaire, which helps identify realistic targets and financial expectations.
The Difference Between Historical Results and Forecasts
If a franchisor chooses to include Item 19, they must clearly separate:
Historical Financial Performance
These disclosures must state:
- The group of outlets measured
- The time period analyzed
- The number of units included
- The number that submitted data
- The percentage that achieved or exceeded the results
- Any defining characteristics of the measured group
Forecasted or Projected Performance
Forecasts require:
- Documented assumptions
- Market conditions
- Operating variables
- Cost expectations
- Clear explanations of how results may differ
Both types of Item 19 data must include a statement that individual results may vary.
Why Item 19 Matters for Franchise Development
A strong Item 19 can significantly improve franchise recruitment, system transparency, and broker support. It helps prospective franchisees evaluate:
- Expected performance
- Likely costs and profitability
- Realistic levels of return
- System stability and viability
A well-constructed Item 19:
- Builds trust
- Improves candidate quality
- Speeds up the validation process
- Differentiates your brand from competitors
- Supports long-term franchise development strategy
For brands looking to grow responsibly, partnering with a franchise development team can help determine what financial performance data is both appropriate and compliant.
Many franchisors also use tools like the Profitability Calculator to better understand their unit economics before preparing Item 19.
Final Thoughts
Yes, franchisors can share earnings or profit expectations with potential franchisees, but only under tightly regulated conditions:
- The information must appear in Item 19
- It must be supported by reliable evidence
- It must be consistent across all communications
- It must follow FTC and state rules
- It must distinguish between historical data and forecasts
Handled correctly, Item 19 is not just a compliance requirement. It is a powerful tool for attracting qualified franchise candidates and setting clear expectations from the start.
Franchisors often work with legal and franchise development professionals to build a compliant, effective Item 19 that supports sustainable long-term growth.