1. How many units are in the table?
Compare the number of units in the table with the number in the system (Item 20 lists it). Franchisors often leave out units open less than a year, closed units and company-owned units. If the table covers half the system, ask what happened to the other half.
2. Average or median?
The average adds everything up; the median is the middle unit. In the worked example below four equal-sized quartiles report 1,450,000, 1,020,000, 810,000 and 560,000 of annual revenue. The average is 960,000, but the middle unit earns 810,000, and half the units are below the average.
3. Convert sales to owner earnings
Assume royalty 6%, ad fund 2%, cost of goods 30%, other variable costs 3%, and fixed costs of 180,000 a year. That is 41% of revenue in variable costs. At 810,000 of revenue, variable costs are 332,100 and owner earnings are 810,000 − 332,100 − 180,000 = 297,900. At 560,000, they are 560,000 − 229,600 − 180,000 = 150,400.
4. Payback and your own pay
With a 350,000 investment, 297,900 of owner earnings pays back in about 1.2 years before tax, debt service and ramp-up; 150,400 takes about 2.3 years. If you need 70,000 a year to live on, subtract it first. Use the reality check to run your own numbers.
Common questions
Is a high average in Item 19 a good sign?
Only if most units are near it. An average that sits far above the median means a few large units are lifting the number. Look at the quartile table and the share of units below the average before you read anything into the headline.
Does Item 19 tell me what I will earn?
No. It describes what other units earned in a past period, under the franchisor's definitions. Your sales depend on your location, your ramp-up and your own management, and your owner earnings depend on costs the table usually omits.
Who should I ask if the numbers look too good?
Franchisees listed in Item 20, including those who recently left, and an independent franchise attorney and accountant. A franchisor's own broker is paid when you sign.