Reviewing Item 19 Before You Buy a Real Estate Franchise

You should carefully review FDD Item 19 before you sign your agreement to learn about financial performance representations. A comprehensive legal check provides safeguards for the investment and realistic expectations of revenue.

Key Takeaways

• Gross versus net is important: Gross commission income is high, but you need to factor in royalties, tech fees, overhead, etc.
• Both federal and state laws regulate disclosures: The FTC Franchise Rule regulates the FDD at the federal level, and some states have registration statutes.
• Be wary of sample sizes: Always verify the percentage of current franchisees who had the same financial results reported.
• Legal review saves you from costly errors: An American franchise attorney will find out what hidden pitfalls are there and how to negotiate more favorable terms.

A franchise disclosure document can be a legally complex and overwhelming document to navigate. You need the most important financial performance information in Item 19 to make the business profitable in the future.

What is FDD Item 19?

The first step you take when you want to buy a real estate franchise is to read the Franchise Disclosure Document (FDD). Franchisors make a financial performance representation through Item 19. There are many times when the difference in historical data and projected earnings will be dramatic. You need to distinguish between what has actually happened and what you think will happen. Many real estate franchises focus on gross commission income rather than profitability to boost the figures.

The FTC Franchise Rule and Legal Framework

When shopping for a real estate franchise, it’s essential to understand just how federal and state laws govern these monetary disclosures. Franchisors do not have to provide Item 19 data. If they do, they should follow very specific statutory guidelines.

Federal Regulations: 16 CFR Part 436 (FTC Franchise Rule)

Federal law requires financial representation to have a reasonable basis and written substantiation. You are entitled to request this underlying evidence.

Gross Sales vs. Net Profits in Real Estate Franchising

The revenue streams of a franchisor must be carefully examined. They tend to focus on overall sales. But there will be a mandatory fee, which will significantly reduce this revenue. Your margins are eaten by royalty, marketing, and technology fees. Prospective buyers should always ask for written expense estimates to demonstrate a real net profit. These expenses must be assessed to determine your actual income.

Red Flags to Watch For in Financial Disclosures

There are some deceptive reporting tactics that you will need to be careful of.

Omitted Expense Data

Some franchise owners deliberately hide operating expenses. They may not include local advertising costs and/or commercial office leasing rates. This is a strategy that artificially increases apparent profitability.

Non-Representative Sample Sizes

It should be investigated whether the data pool used in the FDD sample sizes is appropriate. Franchisors may only share information on the most successful brokerages in high-cost metropolitan markets. When the sample size includes non-struggling locations, you’re looking at a skewed reality.

Why You Need a Real Estate Franchise Lawyer

An experienced USA franchise lawyer is essential to review the FDD before committing to the deal. Your legal advocate ensures you don’t enter into a restrictive or excessively costly franchise agreement.

You don’t want to sign a franchise agreement without reading the financial disclosures, because you could be in a lot of trouble. Get a trusted real estate franchise attorney for your real estate business today. Call the law firm today to take the time to review your Item 19 in detail.