How to Verify an Item 19 Earnings Claim: A Buyer's Workflow

Only about 70% of FDDs include an Item 19 — and of those, fewer than half disclose actual unit-level expenses. That gap is where franchise buyers lose money. An Item 19 is the single most quoted document in any sales conversation, and the single least verified before close.

This guide walks the workflow our analysts use to verify franchise Item 19 disclosures from the moment you receive the FDD to the moment you sign. It assumes you already understand what an Item 19 is — if not, start with our primer on Item 19 financial performance representations and come back.

What “reasonable basis” means under the FTC rule

The FTC Franchise Rule, Section 436.9(c), is short and specific. A franchisor may make a financial performance representation only if it has a “reasonable basis” and “written substantiation” for the claim at the time it is made, and it must provide that substantiation to a prospective buyer on reasonable request.

Two phrases carry the weight here. “Reasonable basis” means the underlying data has to be real — verifiable financial reports from operating units, not projections, not rounded estimates, not a single flagship store. “Material basis” means the franchisor must disclose the assumptions behind the number: which units are included, what time period, what was excluded, and why.

In practice, the FTC enforces this loosely. The agency rarely audits Item 19 disclosures directly. State examiners in registration states (California, New York, Illinois, Minnesota, Maryland, Virginia, Washington, Wisconsin, Hawaii, Indiana, Michigan, North Dakota, Rhode Island, South Dakota) push back more aggressively, but most of the verification burden falls on you, the buyer.

That is why your substantiation request matters. It is not a formality. It is the document that forces the franchisor to put their data foundation in writing — and gives you something to compare against franchisee interviews.

The substantiation request: exact email language to send the franchisor

Send this within 48 hours of receiving the FDD. Do not wait for a sales rep to walk you through Item 19. The sooner you ask, the cleaner the response.

Subject: Item 19 Substantiation Request — [Your Name]

Hi [Franchise Development Contact],

Thank you for sharing the FDD. Before I move forward with discovery day, I’d like to formally request the written substantiation for the financial performance representations in Item 19, as provided for under FTC Franchise Rule Section 436.9(c).

Specifically, I’m requesting:

1. The full set of franchisee-reported financial data used to calculate each figure shown in Item 19, with locations anonymized.
2. The reporting period, the number of operators included, and the criteria used to include or exclude them.
3. Median, top-quartile, and bottom-quartile figures for any metric where only an average or “top performer” number is currently disclosed.
4. Same-store comparison data for any store included in more than one reporting period.
5. A list of any material adjustments or exclusions made to the underlying data (e.g., closed locations, those under remodel, corporate-operated stores).

Please send the substantiation in writing. I am happy to sign a reasonable NDA if needed.

Thank you, [Your Name]

The response itself is diagnostic. A confident franchisor sends the file within a week, often with a short call to walk you through it. A weak franchisor stalls, redirects you to “talk to existing franchisees,” or sends a one-page summary that restates the FDD. Both of those last responses are answers in their own right.

Sample-size red flags: top quartile vs system average gaming

This is where most Item 19 disclosures hide their problems. The number on the page is real — but the population behind the number is curated. Here is how to spot it.

Indicator	Strong Item 19	Weak Item 19
Locations included	All stores open >12 months (e.g., 187 of 210)	“Top performers” or unspecified subset
Tenure breakdown	Year 1, Year 2, Year 3+ cohorts shown	All operators pooled regardless of age
Statistics shown	Median, mean, quartiles, range	Mean only, or “top X stores averaged”
Expense disclosure	COGS, labor, rent, royalties, EBITDA	Revenue only
Same-store growth	YoY same-store comparison included	New stores mixed with mature ones
Closed locations	Disclosed and explained	Excluded silently
Corporate vs franchised	Reported separately	Combined or only corporate shown

Two patterns deserve specific attention.

Top-quartile gaming. A brand reports “average gross sales of $1.4M for the top 25% of stores open more than 24 months.” Mathematically true. Practically misleading. The bottom quartile in the same system might be doing $480K — and that is the number that determines whether you make payroll. Always ask for the median across all units, not the average of the top.

Maturation gaming. Pooling Year 1 stores with Year 5 stores inflates the average because mature units carry the cohort. A clean Item 19 separates units by tenure. If yours doesn’t, ask. Our unit economics analysis guide walks through how to rebuild cohorts from raw data once you have it.

The fix is mechanical: request the data broken out by quartile and by tenure cohort. If the franchisor cannot or will not provide it, that is the answer.

Working through this on a real FDD? Our $499 FDD Analysis Report runs this exact verification workflow on the disclosure document you just received — substantiation request review, sample-size audit, pro-forma rebuild, and a flagged list of every assumption that doesn’t hold up. Most buyers find the issues alone justify the price.

The validation call: 7 questions to triangulate the claim

Item 20 of the FDD lists every current and former franchisee with contact information. Use it. Eight to twelve calls is the right range — enough to spot patterns, few enough to actually finish in two weeks.

Here are the seven questions that pull the most signal. Ask all of them on every call.

1. What were your total gross sales last calendar year, rounded to the nearest $50K? Compare directly to Item 19. If five franchisees report numbers 30%+ below the disclosed median, the disclosure is selecting up.
2. What were your total operating expenses as a percentage of revenue? This is the number Item 19 most often hides. You want to hear 65 to 85 cents on the dollar, depending on the model.
3. How long did it take you to reach breakeven on a monthly cash basis? Most franchisors quote “ramp” loosely. Real numbers cluster between 6 and 18 months for service brands and 12 to 30 months for food and retail.
4. What was your actual total investment, including overruns? Compare to Item 7. Overruns of 10–15% are normal; 30%+ is a flag on the franchisor’s build-out estimates.
5. What did the franchisor not tell you that you wish you had known? Open-ended on purpose. The answers cluster fast — if three franchisees independently mention the same surprise, treat it as a system fact.
6. How accurate was Item 19 compared to your real performance? Direct, but it works. Most franchisees will give you a candid answer if you ask plainly.
7. Would you buy another unit today at current terms? The single best predictor of system health. If less than 60% say yes, the economics are softer than the FDD suggests.

Our deeper list of questions to ask existing franchisees covers operational and franchisor-relationship questions to layer on top of these seven.

Building your own pro-forma from disclosed inputs

Once substantiation is in hand and validation calls are done, you have enough to build a clean pro-forma — the single most important spreadsheet in the entire diligence process.

Pull these inputs from the FDD: initial investment range from Item 7, royalty and ad fund percentages from Item 6, and revenue assumptions from Item 19 (using median, not mean). Layer in the expense ratios you collected on validation calls. The output is a unit-level P&L that reflects what an actual operator earns, not what the brochure projects.

A few mechanical rules:

• Use the median revenue figure from Item 19, not the average. Averages are dragged up by outliers.
• Apply the 75th-percentile expense ratio from your franchisee calls, not the 50th. You want a margin of safety.
• Subtract a realistic owner draw or general manager salary. If you plan to operate the unit, your time has a cost. If you plan to hire, that salary is a real line item.
• Run a break-even sensitivity at 80% of median revenue. If the unit loses money at 80% of median, you are buying a job that pays only when everything goes right.

The franchise investment calculator handles the arithmetic if you want a starting template. Plug in your Item 7 totals, your validated revenue assumption, and your expense ratios, and it returns payback period, ROI, and break-even revenue.

The pro-forma is also where Item 19 disclosures get their final test. If your model — built from the same inputs the franchisor used — produces a number meaningfully below the Item 19 figure, one of two things is happening. Either your assumptions are too conservative, or the disclosure is leaning on selection. Both are worth a follow-up call.

When to require an independent CPA review

Most buyers do not need a CPA review. The substantiation request, validation calls, and a clean pro-forma get you 90% of the way. But there are four situations where a CPA review is worth the $1,500 to $4,000 it typically costs.

The investment exceeds $500K. The dollar exposure justifies a second set of eyes on the underlying data.

The Item 19 is unusually thin or unusually rich. A disclosure that shows only revenue with no expense detail, or one that breaks out 14 metrics across five cohorts, both deserve a professional read. Thin disclosures hide cost; rich ones hide complexity.

You are buying multiple units or a regional development agreement. The financial commitment compounds — and a CPA can model the territory’s cumulative cash needs in a way most prospective franchisees cannot.

The franchisor is newer than 5 years or smaller than 50 units. Less operating history means more reliance on extrapolation. A CPA can stress-test the assumptions a franchisor makes when they have only 30 stores of data to draw from.

The right CPA for this work is one who has reviewed at least 10 prior FDDs and ideally specializes in franchise diligence. A general-practice CPA will check the math but miss the disclosure-specific games. Ask any candidate directly: how many Item 19 reviews have you done in the last 24 months?

Want this workflow done for you? Our $499 FDD Analysis Report delivers the substantiation request review, sample-size audit, validation call script, pro-forma, and a written verdict on whether the Item 19 holds up — typically within 5 business days. Most buyers come back for a Competitive Intel Report before signing, so they can compare the same metrics across two or three brands.

The verification work above looks like a lot. It is — for one disclosure. The franchisors who survive the workflow are the ones worth your money. The ones who stall, redirect, or refuse to substantiate have already told you what you needed to know.