Item 19 Shows Revenue, Not Profit: Build a Pro-Forma

A buyer once told me he’d “run the numbers” on a sandwich franchise. What he’d actually done was read the Item 19 average — about $710,000 in unit sales — and decided he could live on that. He hadn’t subtracted a single dollar of cost. The franchisor disclosed revenue, his brain filled in “income,” and he was three weeks from signing on a number that was off by roughly his entire mortgage.

That gap is the most expensive misread in franchising, and it’s structural. The Financial Performance Representation in Item 19 is where a franchisor may disclose how its units perform, and most now do — around 86% of FDDs include an FPR. But disclosure of revenue is not disclosure of profit, and the rule lets a franchisor stop wherever it likes. So you have to finish the statement yourself.

What Item 19 gives you (and what it hides)

Item 19 is the only place in the FDD where earnings claims are allowed, and franchisors choose how much to show. The pattern across disclosures is lopsided: roughly 86% include some FPR, about 63% of those disclose at least some expense figures, around 49% say something about profitability, and only about 24% provide a full profit-and-loss (sometimes called an AFDR — average franchise data report). So three out of four buyers are handed a revenue line and expected to model everything beneath it.

Even the top-line you’re given is slippery. It’s often a system-wide average, blended across mature units and new ones, strong markets and weak ones, company-owned and franchised. It usually reflects units that survived — the ones that closed mid-year aren’t in the denominator. And an average gets pulled upward by a few standouts. We pull this apart in detail in our guide to Item 19 red flags and misleading data; the short version is that the headline figure is a starting point, not a verdict.

The pro-forma below is how you turn that starting point into a defensible estimate of your own take-home. Five steps, in order.

Step 1: Pick the right top-line

Your first decision is which number to build on, and it matters more than any line below it because everything downstream is a percentage of this.

When the FDD discloses both an average and a median, prefer the median. The median is the middle unit; half the system does better, half does worse. The average can sit well above the median because high performers stretch it. Then find — or estimate — the single most useful stat: what percentage of units actually beat the figure you’re using. The franchise-disclosure guidance is blunt about how skewed this can get. In one real FDD analyzed by Drumm Law, only 40.8% of units (715 of 1,754) exceeded the system average. Build off that average and you’ve quietly assumed you’ll outperform almost 60% of existing operators on day one.

If only an average is disclosed, don’t accept it at face value. Treat it as a ceiling, shade your working top-line down toward where a typical unit likely sits, and confirm the read on validation calls. Our breakdown of average vs. median and survivorship bias walks through exactly why the mean flatters a system.

Step 2: Haircut for a realistic Year-1 single unit

Whatever number you carried out of Step 1 describes a system, not your store in its first twelve months. Apply two haircuts, explicitly, so you can see what each one costs you.

The ramp-up haircut. New units don’t open at the mature average. They build a customer base, the staff is learning, marketing hasn’t compounded. Many concepts take one to three years to reach a steady-state run rate. A reasonable Year-1 starting point is a meaningful discount to the mature figure — the exact size depends on the concept, and franchisee calls are how you calibrate it. If existing owners tell you their first year ran 30% under their current sales, use that, not a guess.

The survivorship haircut. The disclosed average usually counts only units open through the reporting period. Units that failed and closed are gone from the math, which means the figure you’re standing on already excludes the worst outcomes. You don’t have to model a closure, but you should know the average is biased upward and resist nudging your top-line back up.

Stack both haircuts onto the median from Step 1 and you’ve got a conservative Year-1 revenue line. That line — not the franchisor’s headline — is the top of your pro-forma.

Step 3: Model COGS, labor, and occupancy as a percentage of sales

Now you build the expense side Item 19 probably skipped. The big three operating costs scale with revenue, so model them as percentages and apply them to your haircut top-line.

A few illustrative rules of thumb to anchor the structure — and these are genuinely just rules of thumb, not numbers from your FDD:

• COGS: in quick-service food, cost of goods often lands somewhere around 28-35% of sales. A service business with no inventory might be near zero.
• Labor: frequently the largest line in a staffed concept, often in the 25-35% range for food and service, lower for an owner-operated model where you’re the labor.
• Occupancy: rent, common-area charges, and utilities, commonly in the high single digits to low teens as a percentage of sales for a retail footprint.

Treat every one of those as a placeholder you replace with reality. Your local lease sets your occupancy. Your market’s wages set your labor. The franchisor’s preferred vendors set much of your COGS. The fastest way to firm these up is to ask existing franchisees directly — our franchise validation process guide includes the cost-side questions most buyers forget to ask. Published benchmarks get you a draft; validation calls get you a number.

Step 4: Subtract the fee stack (Item 6) and debt service

Here’s the line that independent businesses never pay and franchise buyers routinely underweight: the franchisor’s cut, charged on revenue, before you see a dollar of profit.

Item 6 lists every recurring fee. The two that bite are the royalty — commonly 4-8% of gross sales — and the ad or brand fund, often 1-4% of gross sales. Both come off the top line, not off profit, so a soft-revenue year still owes the full percentage. Add any technology fee, local marketing minimum, or required software. Our walkthrough of the true cost of ongoing franchise fees shows how these compound across the term.

Then subtract debt service. If you financed the build-out and fee with an SBA loan, your monthly principal-and-interest payment is a fixed cash outflow whether sales hit the average or not. This is the line that turns a thin-but-positive operating profit into a negative cash position, and it’s the line Item 19 will never show you.

Step 5: Build a conservative base case and a sensitivity case

A single-column pro-forma is a guess wearing a suit. Build two columns: a conservative base case using your haircut top-line and real local costs, and a downside sensitivity case where revenue comes in another 15-25% lower. If the deal services its debt and pays you a market salary in the downside column, it has room to be wrong. If it only works at the average, you’re betting the house on a brochure.

Here’s the shape of the statement, from the Item 19 top-line all the way down to what you keep. The numbers are illustrative — plug in your own haircut revenue and your validated local costs:

Line item	% of sales	Base case (conservative)	Downside case
Item 19 system average (starting point)	—	$700,000	$700,000
Year-1 haircut (ramp + survivorship)	—	−$140,000	−$245,000
Your top-line revenue	100%	$560,000	$455,000
Cost of goods sold	30%	−$168,000	−$136,500
Labor	28%	−$156,800	−$127,400
Occupancy	10%	−$56,000	−$45,500
Royalty (Item 6, e.g. 6%)	6%	−$33,600	−$27,300
Ad fund (Item 6, e.g. 2%)	2%	−$11,200	−$9,100
Other operating expenses	8%	−$44,800	−$36,400
Operating profit	—	$89,600	$72,800
Owner salary (pay yourself first)	—	−$60,000	−$60,000
Debt service (SBA P&I, illustrative)	—	−$36,000	−$36,000
Owner profit (what you actually keep)	—	−$6,400	−$23,200

Read the bottom line, not the top. A unit doing $560,000 — below the disclosed average but plausible for Year 1 — slips into the red once you pay yourself and service the loan. That is not a doomed business; it’s a normal first year for a leveraged single unit, and it’s exactly the picture the franchisor’s $700,000 headline erases. The pro-forma exists to surface that picture before you sign, not after.

If you want this built rigorously for a specific brand — the right top-line pulled from the actual Item 19, the haircuts calibrated, the Item 6 fee stack and a real SBA payment layered in — that’s the core of our $49 Tier 2 report. We rebuild the pro-forma for you, so you’re deciding on your likely take-home instead of the franchisor’s revenue average.

What the pro-forma can and can’t tell you

A pro-forma is a disciplined estimate, not a promise. It can tell you whether a deal has any margin for error, where the money actually leaks, and how far below the average you can fall before the business stops paying you. It can’t predict your specific market, your management, or a bad lease you haven’t signed yet.

What it does best is convert a marketing number into a question you can actually answer: not “can I live on $700,000 in sales?” but “does this still work when I’m doing $455,000, paying myself $60,000, and writing a $3,000 loan check every month?” The franchisor disclosed enough to start that math. Item 19 stops at revenue on purpose — finishing the statement is your job, and it’s the difference between buying a number and buying a business.

When you’re ready to pressure-test a real brand, our Tier 2 report does exactly this build for $49: your conservative top-line, the full expense stack, the fees, and the debt service, laid out so the bottom line — owner profit — is the figure you’re deciding on. Don’t sign off on a revenue average. Sign off on what you’d take home.