The NOI That Isn’t Yours: Why the Only Profitability Number in School of Rock’s FDD Belongs to Corporate — Not to You

You have read the 2025 FDD. You found the Item 19 financial performance representation, and a number jumped off the page: 22.4% net operating income.

You dropped it into your pro forma. You multiplied it by the franchised average revenue of $672,488. You got $150,637 and thought: that is a workable return on a $500K–$700K investment. Maybe you even ran it past your lender.

Here is the problem. That 22.4% does not belong to you. It belongs to School of Rock Franchising LLC’s corporate-operated schools — 46 of them, run by salaried managers, placed in hand-picked markets, unburdened by the franchise fee stack you will pay. The 223 franchised schools in the same FDD? Their NOI is not disclosed. Not partially, not in ranges, not by quartile. It is absent.

The gap between “company-owned NOI is 22.4%” and “franchised NOI is not disclosed” is where the most expensive modeling errors in franchise finance live. This article walks through what that number actually represents, why adjusting it for royalties is not enough, and what to use instead.

The Item 19 financial performance representation in School of Rock’s 2025 FDD (reporting FY2024 results) contains two populations:

The company-owned P&L is relatively detailed. Revenue of $925,351, operating costs of $718,258, net operating income of $207,093. That yields a 22.4% margin.

The franchised column reports revenue only. No cost breakdown. No operating income. No margin.

This is legal. The FTC Franchise Rule requires that whatever a franchisor chooses to disclose in Item 19 must be accurate and have a reasonable basis. It does not require the franchisor to disclose anything at all. Roughly 35–40% of franchise systems provide no Item 19 data whatsoever. School of Rock chose a middle path: full company-owned financials, revenue-only for franchised units.

That choice is itself a data point. We will return to it.

The FDD includes a note that company-owned financials impute an 8% royalty charge to make the two populations more comparable. This is a responsible disclosure practice. It means the $207,093 NOI already accounts for a hypothetical royalty payment that corporate schools do not actually make.

Many buyers stop there. They see the imputed royalty and assume the company-owned NOI is now a fair proxy for franchised profitability.

It is not. The royalty is one of at least six cost categories where franchisees face materially higher expenses than company-owned locations — and the imputation addresses only one of them.

1. The rest of the fee stack

The 8% royalty is imputed. The 3% brand fund contribution is not. The up to 3% advertising co-op fee is not. At the franchised average revenue of $672,488, those additional fees total $20,175 to $40,349 per year. The full FDD and financial analysis breaks down each fee component and when they are triggered.

Even if you apply the company-owned cost structure to franchised revenue, these fees come off the top before any operating expense is paid.

2. Higher occupancy costs

Company-owned schools benefit from corporate site selection — a process with dedicated real estate professionals, proprietary demographic models, and the leverage to negotiate institutional-grade lease terms. Franchisees select their own sites, often from whatever is available in their territory, and negotiate leases as individual operators.

The result: franchisee rent as a percentage of revenue is typically higher. Industry benchmarks for children’s enrichment franchises put occupancy at 10–12% of gross revenue. At the franchised average of $672,488, that is $67,249 to $80,699. Whether the company-owned occupancy cost embedded in that 22.4% margin matches this range is unknowable from the FDD — but the structural disadvantage runs in one direction.

3. The $17,400 technology tax

Every franchisee pays a mandatory technology cost floor that company-owned schools absorb differently within the corporate P&L:

• Technology fee: $260/month ($3,120/year)
• Licensing and curriculum fees: $78/month ($936/year)
• Method App per-student fees: $6.21/student/month

At 179 enrolled students (the approximate breakeven threshold), the Method App alone costs $13,339 per year. Total technology cost floor: approximately $17,395.

This fee scales with enrollment. A school with 250 students pays $18,630 in Method App fees alone. The per-student charge means your technology costs rise in lockstep with the revenue growth you need — a drag that does not appear in company-owned P&L because corporate absorbs platform costs centrally.

4. Local marketing spend beyond the brand fund

The 3% brand fund covers national and digital campaigns managed by corporate. It does not cover the local marketing a franchisee needs to fill a school: grand opening events, local SEO, community sponsorships, direct mail, social media advertising, referral incentives.

Franchisees in competitive suburban markets routinely spend $10,000–$20,000 per year on local marketing above the brand fund. That spend is discretionary in theory and mandatory in practice. A school that does not market locally does not enroll locally.

5. Owner compensation vs. salaried GM

Company-owned schools are run by salaried general managers whose compensation is a line item within operating costs. The 22.4% NOI is calculated after paying that manager.

For a franchisee owner-operator, there is no manager salary in the cost structure — because the owner is the manager. The NOI is the owner’s compensation. At the company-owned margin of 22.4% applied to franchised average revenue, that implies $150,637 before debt service. But that number must also cover the cost of the owner’s time, benefits, and the opportunity cost of the capital invested.

For a semi-absentee owner who hires a GM, the math inverts. Now the GM salary ($55,000–$75,000 in most markets) comes out of operating expenses, collapsing the margin to single digits or negative territory at median revenue. The operations and staffing analysis covers the staffing model in detail.

6. Cost of capital

A franchisee investing $425,250 to $704,800 (the Item 7 range) carries a cost of capital that company-owned schools do not. Whether financed through an SBA 7(a) loan or personal savings, that capital has a cost. For a detailed breakdown, see the financing analysis.

SBA debt service on a $500,000 loan at current rates runs approximately $55,000–$65,000 per year. That payment comes out of whatever remains after operating expenses and fees. Company-owned NOI has no equivalent deduction.

Strip away the adjustments, and the 22.4% NOI margin tells you one thing clearly: School of Rock’s corporate team can operate a music school profitably at scale.

That is genuinely useful information. It means the business model works — the curriculum drives enrollment, the pricing supports the cost structure, the brand has market pull. If company-owned schools could not turn a profit, the franchise model would have no foundation.

But corporate operating efficiency at scale is not franchisee operating efficiency at unit level. The 22.4% reflects:

• Site selection advantages — corporate picks locations with data and resources unavailable to most franchisees
• Bulk purchasing and vendor leverage — 46 company-owned schools negotiate as a block
• Centralized management overhead absorption — HR, accounting, compliance, and training costs spread across the corporate portfolio rather than borne by a single unit
• No franchise fees — despite the imputed royalty, company-owned schools do not actually remit fees
• Portfolio-level risk management — a weak quarter at one school is absorbed by the portfolio; a franchisee has no such buffer

The 38% revenue gap between company-owned and franchised schools compounds this. Company-owned schools generate $925,351 in average revenue versus $672,488 for franchised units. Higher revenue on a more efficient cost base produces margins that a franchisee at a lower revenue level with a higher cost base cannot replicate.

Let us build the math from the franchisee’s actual cost structure rather than borrowing corporate’s.

Starting point: franchised average revenue of $672,488.

That $174,420 looks reasonable — until you account for two items the table above does not include.

Debt service: At a $500,000 SBA loan, annual payments run $55,000–$65,000. Subtracting the midpoint ($60,000) leaves $114,420.

Owner compensation: If you are the operator, this $114,420 is your total compensation — salary, benefits, and return on investment. For a $500K+ investment requiring 50+ hours per week, that is a loaded hourly rate of roughly $44.

If you hire a GM for the semi-absentee model at $65,000, your pre-tax return on invested capital drops to $49,420 — a 7–10% return on a half-million-dollar illiquid investment.

And this is the average-revenue scenario. At the franchised median of $640,486, every line item stays roughly the same (the fixed costs are truly fixed) while revenue drops by $32,000. At a bottom-quartile school doing $400,000, the math produces negative owner earnings.

The point is not that the franchise cannot work. The point is that the company-owned 22.4% NOI margin leads you to expect $150,637 in earnings when the realistic number, after franchisee-specific costs and debt service, is closer to $114,000 for an owner-operator and under $50,000 for a semi-absentee owner — at average revenue.

Only 60–65% of franchise systems include any Item 19 financial performance data. School of Rock is ahead of the curve by disclosing at all. But it chose a specific disclosure strategy: full P&L for company-owned, revenue-only for franchised.

Why?

The FTC’s guidance on Item 19 is clear: franchisors are not required to disclose profitability data, but what they disclose must be accurate and not misleading. A franchisor that discloses franchised NOI commits to that number being defensible.

Three possible readings of the non-disclosure:

1. Franchised NOI varies too widely to report responsibly. If the range spans from deep losses to strong profits, any single number could mislead. This is a legitimate reason — but it also tells you the system has wide variance in unit-level outcomes.

2. Franchised NOI is materially lower than company-owned, and disclosure would raise questions. If the average franchised margin is 8–12% versus 22.4% for company-owned, that gap becomes a sales objection. Non-disclosure avoids the comparison.

3. The data infrastructure does not exist. Some franchisors genuinely do not collect standardized P&L data from franchisees. This is becoming less common as POS and accounting integrations improve, but it remains possible.

You cannot know which explanation applies from the FDD alone. But the pattern — disclose where the numbers look strong, withhold where they might not — is common enough in franchise finance to warrant scrutiny.

If you cannot use the 22.4% company-owned margin as your franchised pro forma, what do you use?

1. Build a P&L from the ground up

Start with the company-owned cost structure as a blueprint, then adjust each line item for franchisee-specific realities. The table earlier in this article is a starting framework. Pressure-test each assumption:

• Get actual lease rates for your target market (not national averages)
• Price out instructor compensation at local prevailing wages
• Confirm the current co-op rate in your region (it may be less than the 3% maximum)
• Model the technology tax at your projected enrollment, not a flat figure

2. Talk to existing franchisees

Item 20 of the FDD lists every current and former franchisee with contact information. This is not optional due diligence — it is the single most important data-gathering step in the process.

Call at least 10 current operators and 5 who have left the system. Ask:

• What is your annual revenue? (Verify it against the Item 19 range)
• What is your actual NOI after all fees and costs?
• How long did it take to reach breakeven?
• What cost surprised you the most?
• Would you do it again at the same investment level?

Former franchisees are especially valuable. They have no incentive to protect the brand and every reason to be candid.

3. Model three scenarios

Do not build a single pro forma. Build three.

Notice that the “optimistic” case uses the average — not the top quartile. If your pro forma requires above-average performance to produce an acceptable return, the deal has negative margin of error.

4. Stress-test debt service coverage

Your lender — whether SBA or conventional — will calculate a debt service coverage ratio (DSCR). They need to see that projected cash flow covers loan payments with room to spare, typically 1.25x or higher.

Run the DSCR at each scenario. If the pessimistic case drops below 1.0x, you are modeling a scenario where the business cannot service its debt. That does not mean it will happen. It means you need to understand how far revenue can fall before it does.

5. Ask the franchisor directly

Nothing prohibits you from asking the development team what franchised NOI looks like. They may decline to answer. They may give you qualitative guidance. They may point you to specific franchisees who are willing to share financials.

What they cannot do is give you a number off the record that contradicts the FDD. If someone in the sales process quotes a margin that is not in Item 19, that is a red flag — and potentially a violation of the FTC Franchise Rule.

The 22.4% NOI in School of Rock’s FDD is real, accurate, and irrelevant to your pro forma. It describes what a company-owned school earns under conditions you will not replicate: corporate site selection, no fee stack, centralized overhead absorption, and portfolio-level risk pooling.

Your actual margin as a franchisee will be shaped by your lease rate, your enrollment ramp, your co-op assessment, your labor market, your debt load, and whether you operate the school yourself or hire a manager. None of those variables appear in the company-owned P&L.

The FDD gives you a blueprint, not a forecast. Use it as a starting point — then build your own numbers from the ground up, validated by conversations with the people who are actually operating these schools today.