How Franchisors Can Build a Strong Item 19
How Much Money Can I Make?
As franchisors work to sell franchises, one question they will always be asked is, “how much money can I make?”. The answer to this question can be found within one section of the Franchise Disclosure Document: Item 19.
In order to create a compelling Item 19, franchisors need financial data on the performance of each franchise location. Typically, it is up to the franchisees to keep their books up to date and share that data with the franchisor. But, like many small business owners, they juggle countless responsibilities, may not understand the complexities of accounting, and bookkeeping understandably falls by the wayside.
An Expert Team
Without the right tools, building a strong Item 19 can feel like a massive undertaking. But, with the support of a franchise bookkeeping team, franchisors can receive timely, accurate information that will help them build a compelling Item 19!
What is Item 19?
Item 19 is a section in the Franchise Disclosure Document (FDD), a document that must be presented to individuals who want to purchase a franchise. The purpose of Item 19 is for franchisors to lay out the financial performance representations (FPR) of the franchise. It paints a picture of how potential franchisees can expect to perform and estimates how much money they could make should they join the franchise.
Why is Item 19 Important?
Item 19 is more than just a rundown of financial performance. It is a powerful tool that aids in decision making, builds trust between the franchisor and potential franchisee, and sets realistic expectations.
- Decision Making. A strong Item 19 helps franchisors attract and select the ideal franchisee candidates. It also ensures that a franchise brand is a solid investment, and helps the franchisee compare their options to determine if they are joining a successful business.
- Trust and Transparency. Item 19 signifies financial transparency and creates trust between the franchisor and potential franchisee. It shows that a franchisor knows their numbers, and has no issue disclosing them. The more information that can be provided on financial performance, the better. This transparency creates strong relationships between franchisors and their franchisees.
- Realistic Expectations. Item 19 allows the franchisor to set realistic expectations for financial performance. While a franchise may be profitable as a whole, individual success can vary. An Item 19 that contains data-backed projections of how much potential franchisees could realistically make provides the clarity they need to make an informed decision.
How to Build a Strong Item 19
What do franchisors need to build a strong Item 19? Put simply, clear, accurate financials. The key elements that create a powerful Item 19 are:
- Average Gross Profit
- Average Gross Sales
- Cost breakdowns of goods and services
- Operating cost insights
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Industry-specific data points (number of customers served, number of services provided or products sold, etc.)
These metrics provide financial insight into the franchise, clearly lay out the costs and obligations of a franchise purchase, and set realistic expectations for financial performance.
The amount of information franchisors are able to share in Item 19 largely depends on the information their franchisees deliver. How can franchisees provide reliable, accurate information to their franchisors? It comes down to consistent monthly bookkeeping.
The Necessary Resources
Franchises have unique needs when it comes to bookkeeping and accounting, such as tracking royalties and advertising fees, and sometimes, multi-currency support. All of it needs to be properly recorded in accounting software so monthly reports can be produced. Franchisors need a team of trusted experts with knowledge of the franchise space, so they can receive accurate data from their franchisees.
- Consistent Monthly Bookkeeping. In order for franchisors to build a strong Item 19, they need up-to-date financial records for each franchise location. A bookkeeper can provide visibility into financial performance on the franchisee’s behalf, so franchisors have access to the information they need across all locations.
An online bookkeeping service is particularly helpful in this situation. Instead of hiring multiple bookkeepers, the franchisor can rely on a single provider who delivers uniform services for each location – no matter where they are located.
- Accurate, Up-to-Date Reports. Accurate monthly reports are crucial to creating a solid Item 19, as all information is legally required to be accurate, truthful, and backed by numbers. A well-documented financial history showcases franchise growth and profitability and helps franchisors create a compelling Item 19.
Expert Bookkeeping for Franchise Businesses
Xendoo Online Bookkeeping is a leading provider of online bookkeeping and accounting services for franchise businesses. Our franchise-focused team provides franchisors with timely report delivery and visibility into financial performance for each location.
Are we a fit for your franchise? Let’s talk! Schedule your free consultation today.