How a Franchising Attorney Reviews Item 19 Claims in California

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.