What Is an Earnings Claim
An earnings claim is any statement a franchisor makes about the financial performance, revenue, or profitability that a franchisee can expect to earn. This includes specific dollar amounts, average unit volumes (AUV), profit margins, or ranges like "franchisees typically earn between $50,000 and $150,000 annually." If a franchisor makes any such representation, it must be documented in Item 19 of the Franchise Disclosure Document (FDD).
The Federal Trade Commission (FTC) enforces strict rules around earnings claims. A franchisor cannot make oral earnings claims that contradict or exceed what appears in Item 19. More importantly, if a franchisor makes any earnings claim in Item 19, it must have reasonable substantiation from actual franchisee data, not projections or best-case scenarios.
Why Earnings Claims Matter in Due Diligence
Earnings claims are central to your franchise evaluation because they directly impact your financial projections and ROI calculations. Many prospective buyers make the initial investment decision based on what they believe they can earn. If these claims are unsupported, your entire financial model collapses.
The FTC allows franchisors to avoid disclosing earnings claims entirely, which is actually common. However, when Item 19 is present, you gain access to real performance data from existing franchisees. You can cross-reference these numbers during your discovery calls with current franchise owners to verify claims and uncover variations by location, franchise tenure, or operating model.
Conversely, the absence of Item 19 signals that the franchisor has not collected or compiled franchisee performance data. This does not automatically mean the franchise is bad, but it means you cannot rely on historical earnings data and must build your own projections from scratch using industry benchmarks.
How Earnings Claims Work in FDD Review
- Item 19 structure: If present, Item 19 displays actual or average earnings, expenses, or profit data from franchisees. The data must be broken down by timeframe (year one, year two, mature units) and often by unit volume or location type.
- Substantiation requirement: Franchisors must retain written documentation proving that earnings claims are based on actual franchisee data, not estimates. The FTC can request this documentation during investigations.
- Disclaimers: Item 19 typically includes disclaimers stating that results vary widely, past performance does not guarantee future results, and that individual success depends on many factors including your own effort and ability.
- Verification step: During due diligence, you should ask to speak with franchisees who match your planned territory and investment level. Cross-check their reported earnings against Item 19 figures. Significant discrepancies raise red flags about data accuracy.
- Missing data: If Item 19 shows incomplete data (e.g., only top 10% performers or only units open 3+ years), the franchisor may be selectively reporting. Request clarification on whether data is median, average, or includes all locations.
Connection to Franchise Terms and Obligations
Earnings claims must be read alongside your franchise agreement terms. If your agreement includes territorial restrictions that limit your customer base, or if renewal terms are conditional on meeting performance thresholds, the franchisor's Item 19 data may not apply to your situation. Similarly, if the franchisor has raised franchise fees or ongoing royalties since the data was compiled, earnings claims based on older franchisees may overstate your net profitability.
Franchisor obligations to support your business (training, marketing, field support) should also be factored in. If Item 19 shows strong earnings but the FDD reveals minimal support obligations, ask current owners whether the published figures account for the cost of hiring outside consultants to fill those gaps.
Common Questions
- Can a franchisor make earnings claims verbally even if Item 19 is blank? No. If a franchisor makes any earnings claim during your discovery process, whether in a presentation, email, or phone call, it must be backed up by Item 19. Verbal claims that contradict or go beyond Item 19 are illegal under FTC rules. Document all earnings statements in writing and request the franchisor cite the specific Item 19 section that supports them.
- What if Item 19 shows only average earnings, not median or range? Averages can be misleading if there are outliers. A few high-performing units can inflate the average while most franchisees earn less. Request the underlying data or ask the franchisor for median earnings and the percentage of units that exceeded the stated average. Current franchisees can also tell you whether they fall above or below Item 19 figures.
- How old can Item 19 data be before it becomes unreliable? The FTC does not set a mandatory refresh rate, but data older than two years should be treated cautiously, especially in industries where consumer demand, labor costs, or technology shift rapidly. Check the data collection date in Item 19 and ask the franchisor when they plan to update it.