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As the publisher of four annual books on franchising and the manager of twelve websites that deal solely with franchising, I have long been fascinated with the increasingly favorable trend among franchisors to provide Financial Performance Representations (Item 19s) in their Franchise Disclosure Documents (FDDs). Realizing how difficult it is for the layman to secure this information, my firm has published Item 19s for key franchisors in an annual publication “How Much Can I Make?”, and are in the process of sending the 13th Edition off to the printers.
What is striking is the percentage of franchisors who now include an Item 19. So far, we have analyzed 463 FDDs from 2013 for franchisors big and small, and have extracted 311 Item 19s, amounting to 67% of franchisors who now include an Item 19. This compares with ~56% in 2012 and ~25% only five years ago. Although the precise underlying reasons for the marked rise in submission are unclear, it is fair to assume that there is an increasing disadvantage to those franchisors who do not include an Item 19. A secondary reason may be the fact that the economy has improved (modestly), and previously reluctant franchisors are now “prouder” of their franchisees’ success than they were several years ago.
If you want to find out “How Much Can I Make?” if you were to buy a specific franchise (or what your competitors’ franchisees made), all 311 of these Item 19s are now available for automatic download on www.Item19s.com for $40 each. Industry packages, which are also immediately downloadable, are available at a greatly reduced cost per unit. All 311 Item 19s are available for $600 (or $1.93 each). It should be noted that roughly 45% of the Item 19s are red-lined, meaning that the previous year's Item 19 has been edited (strike-through) by the franchisor to reflect changes between years. This is for the benefit of the various state administrators who, theoretically, check the annual FDDs.
Going forward, the World Franchising Network will provide a sample Item 19 each week that we feel is exceptional in the level of detail and potential value to the prospective franchisee. To access the 2013 Item 19 for Anytime Fitness, please click here. If you would like more information about Anytime Fitness, please click here. Because of the information provided and the overall strength of the company, we feel that Anytime Fitness is worthy of your consideration.
My sense is that franchisors are increasingly convinced that they have a competitive advantage in providing this critical information to prospective investors (versus a significant disadvantage by not doing so). Franchisee lenders are increasingly demanding to know how their prospective client franchisees will repay a loan. Equally important is the ability of franchisors who provide an Item 19 (regardless of the level of detail) to minimize potential lawsuits from franchisees who say that they were promised by the franchisor’s staff (or brokers) that they could make a “fortune” if they bought a franchise. By providing this information, these largely frivolous lawsuits can be minimized.
Time will tell whether Item 19 disclosure will continue to increase. I would speculate, however, that the governing bodies of the franchising community will ultimately make the inclusion of an Item 19 mandatory. Given that most franchisees will be investing a significant portion of their net worth, such a mandatory disclosure seems only fair.