1. Financial Performance Claims Trigger Item 19 Disclosure Rules
A franchisor need not provide earnings estimates. Once a seller makes a financial performance representation, 16 C.F.R. § 436.5(s) requires a reasonable basis, written substantiation, and Item 19 disclosure. Labels do not change that duty.
Revenue and Break-Even Statements May Be Earnings Claims
Average sales, estimated profits, and break-even forecasts may be financial performance representations. Even a calculator based on customer traffic and average spending can convey an earnings claim. The rule covers oral, visual, and written statements.
Consider how a buyer would interpret each chart. Historical revenue should not be presented as a new operator’s take-home income.
Choosing Not to Make Earnings Claims Has Consequences
Without an earnings representation, Item 19 must contain the prescribed no-representation statement. Employees and brokers generally cannot supply informal estimates in its place. Actual records of an existing outlet offered for sale are a limited exception. The franchise disclosure document covers other obligations; Item 19 governs earnings claims.
2. Substantiation Must Match the Figures Given to Prospects
Supporting evidence must exist when the seller makes the claim. A later spreadsheet cannot cure an unsupported estimate. Each figure should trace to identified outlets, periods, and calculations.
Historical Results Need a Defined Sample
Item 19 must distinguish historical results from projections. For historical results, § 436.5(s)(3)(ii) requires dates, outlet populations, sample sizes, and the number and percentage meeting or exceeding the stated result. Item 19 must also disclose material differences from the proposed outlet.
Mature company-owned stores may not reflect a new franchisee’s royalty costs. An average drawn from selected outlets must not imply that the sample represents the entire system.
Forecasts Need Material Assumptions
Section 436.5(s)(3)(iii) requires a forecast’s material bases and assumptions, including relevant market conditions, costs, and operating expenses. A sales target alone is not a factual foundation. Results from established outlets may need adjustment for an untested market.
Written Substantiation Must Be Available
Royalty reports, sales exports, financial statements, market studies, and worksheets may provide support if reliable. Keep the original calculations and distinguish gross sales from profit.
Item 19 must state that written substantiation is available on reasonable request. Section 436.9(d) prohibits withholding it from prospective franchisees or the FTC after such a request.
3. Sales Communications Must Agree with the Disclosures
A correct FDD cannot excuse a contradictory pitch. Sections 436.9(a) and (c) restrict sales statements and financial performance claims. California Corporations Code § 31201 separately prohibits materially misleading franchise-offer communications.
Scripts, Advertising, and Brokers Require the Same Data Check
Compare advertisements, emails, presentations, and broker scripts with Item 19. For historical claims, § 436.9(c) also requires disclosure of reporting dates and the number and percentage of outlets meeting the result, plus a warning that individual results may differ.
Gross revenue should not be described as take-home income. General advertising compliance does not replace franchise-specific duties. Preserve approved versions of marketing materials.
Supplemental Figures Are Limited Exceptions
Section 436.5(s)(5) allows a written supplement for a particular location or variation when Item 19 already contains an earnings claim. The supplement must explain differences and meet specified substantiation and disclosure requirements.
Section 436.5(s)(4) separately permits actual operating results of an existing outlet offered for sale to be shared only with potential buyers of that outlet. Neither exception authorizes broad circulation of unsupported forecasts.
4. California Registration Adds Separate Requirements
The FTC rule sets federal earnings-disclosure standards. California adds franchise registration and advertising requirements for covered offers. Under Corporations Code § 31114, registration is not state approval or endorsement of the offer.
Gross-Sales Figures Can Trigger a Required Warning
Under 10 Cal. Code Regs. § 310.114.1(c)(6), an earnings claim that omits specified costs or operating expenses triggers a prescribed warning. It explains that gross revenue is not net profit and advises independent investigation of expenses. The warning does not replace the evidence supporting the figures.
Material Changes and Advertisements Need Separate Review
Corporations Code § 31123 requires a prompt registration amendment application after a material change in filed information. Updated data or forecasts warrant a materiality review; not every numerical change requires amendment. DFPI instructions call for clean and marked FDD copies when the document changes.
Under § 31156, covered advertisements generally must be filed at least three business days before publication unless a shorter period or exemption applies. The DFPI does not routinely issue advertising approvals. General franchise law questions are separate from Item 19 substantiation.
5. A Franchising Attorney Reviews Claims before Recruitment
A pre-recruitment review tracks figures from source files through Item 19 to marketing materials. It identifies unsupported statements before prospects see them.
Compare Item 19 with the Franchise Agreement
A franchising attorney can compare forecasts with obligations in the franchise agreement. Royalties, advertising fees, and mandatory purchases affect the gap between revenue and earnings. Contract review complements, but does not replace, Item 19 substantiation.
Preserve the Approval Trail and Recheck Changed Data
Retain dated calculations, source records, FDD versions, approved presentations, and broker communications. Record which figures were in use when each prospect received them.
Reassess claims when performance data or market assumptions change. Counsel can evaluate disclosure and filing duties; the franchisor remains responsible for the factual basis of its statements.
30 Oct, 2026
