Franchisors often think about territories as an operational concept. In reality, territory design is a legal and strategic cornerstone that shapes franchise growth, unit level economics, compliance risk, and the reliability of financial performance representations. That is why what you disclose in Item 12 of your Franchise Disclosure Document is not simply boilerplate. It forms the foundation for every earnings related statement you make in Item 19.
One of the most overlooked relationships in the entire FDD is the link between unclear or inconsistent territory definitions and the accuracy of financial performance data. When territories are not consistently structured or adequately described, franchisors can unintentionally undermine the credibility of their Item 19 disclosures and expose themselves to unnecessary regulatory and litigation risk.
This article explains why territory size matters, how Item 12 and Item 19 intersect, and what franchisors can do to present compliant and defensible financial performance representations.
Item 12 requires franchisors to disclose the size, type, exclusivity, and material characteristics of the territory granted to franchisees. Item 19 allows franchisors to disclose earnings information, but only if they have a reasonable basis for the claim and written substantiation at the time the representation is made.
These two Items may seem unrelated. They are not. If the performance data you present in Item 19 is generated from franchisees who operate in territories that differ materially from what you are offering to new buyers, then the earnings claim may be misleading.
This is grounded in a simple principle of the FTC Rule. Financial performance representations must have a reasonable basis. That means the franchisor must be able to explain why the data being presented is representative of what a new franchisee can reasonably expect given their location, their market, and the territory they will operate.
If a franchisor is selling franchises with a population of one hundred thousand people, but the Item 19 data is primarily drawn from territories with a population of one million people, then the performance claim almost certainly lacks a reasonable basis. This is true even if the numbers themselves are accurate. Although an extreme example, the mismatch between the data and the opportunity being offered in this scenario is clear.
Many emerging franchisors develop territories organically. Some early operators negotiate large geographic areas. Others start in dense markets and receive small radius based territories. Some units operate in non exclusive models with no defined boundaries at all. When this happens, the franchise system ends up with a patchwork of territories that differ dramatically in size, population, demographics, drive times, and potential customer base.
If these inconsistent territories are all included in the same Item 19 calculation without explanation, the resulting financial performance representation may be misleading. Regulators and plaintiffs’ attorneys focus heavily on whether the franchisor provided a consistent and transparent basis for its earnings claims. When they see evidence that the franchisor’s sample population is materially different from what the franchisor now sells, they often argue that the franchisor overstated earning potential or induced franchisees with non comparable data.
Consider this common example. A franchisor averages all gross revenue numbers and publishes a headline figure of 1.2 million dollars. However, most of the system revenue came from large, densely populated, legacy territories. New franchisees are now being sold compact territories with smaller trade areas and more internal competition. Although the number may be mathematically correct, the average past performance is not representative of the opportunity being sold today.
This is where liability arises. Misleading Item 19 disclosures do not need to be false to be unreasonable.
Franchisors can generally present data by grouping territories, but they must do it carefully. For example, a franchisor can segment franchisees into categories:
This approach can be effective if the franchisor also provides clarity in Item 12 regarding the material characteristics of territories and explains how those characteristics relate to the financial data.
To use grouped FPR data compliant with the FTC Rule, the franchisor should ensure the following.
Grouped data can help a franchisor tell a more accurate story. It also reduces the risk that franchisees will rely on numbers generated from territories that bear little resemblance to the territories they will operate. However, these disclosures must be carefully raised as disclaimers are generally prohibited.
If a franchisor uses inconsistent territory data to justify Item 19 claims, several types of exposure can follow.
The regulatory standard focuses on reasonableness and substantiation. When a franchisor cannot justify why its Item 19 numbers reflect the opportunity being offered, the disclosure becomes a liability. Even well intentioned franchisors can encounter issues when historical territory structures evolve over time and the financial disclosures are not updated to reflect those changes. In some cases, these risks deter franchisors from making an Item 19 claim at all.
A well drafted and consistently applied Item 12 is one of the most effective ways to strengthen the credibility of Item 19 financial performance representations. Territory mapping should never be an afterthought. Instead, it should support compliance and sales by giving the franchisor a defendable basis for the earnings claims it chooses to make.
Strong territory structure provides several benefits.
Tools like Zors allow franchisors to map territories with precision using census based population estimates, data overlays, and territory archetypes. This helps franchisors ensure consistency, defendability, and scalability while reducing the risk that mapping decisions will undermine future FDD disclosures.
Item 12 territory definitions and Item 19 financial performance representations are closely connected. If franchisors want to make accurate and defensible earnings disclosures, they must ensure the territories described in Item 12 align with the territories used to generate Item 19 data. Consistency provides the reasonable basis required by the FTC Rule and helps protect franchisors against claims that their earnings claims were misleading.
Franchise systems that take territory mapping seriously enjoy a significant advantage. They can present financial data with greater confidence, support franchisee expectations more effectively, and grow with fewer legal complications.
If your franchise is preparing to update its FDD or restructure its territories, modern mapping platforms like Zors can help you create consistent, compliant, and scalable territory strategies that support both growth and regulatory accuracy.
👉 See how Zors can power your franchise compliance and growth, with features like franchise registration management, integrated document signing, and robust CRM tools.
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🛑 Disclaimer:
The information provided in this blog post is for general informational purposes only and is not legal advice or a substitute for consulting with a qualified attorney. Franchise law is complex and highly nuanced, governed by both federal regulations and varying state-specific laws. Proper legal guidance requires a detailed understanding of these rules as applied to your specific circumstances. You should not act—or refrain from acting—based on anything in this post. You should consult your franchise attorney for legal advice.
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