What Item 20 Contains
Item 20 contains five tables with detailed information about the franchise system's outlets and a contact list of current and former franchisees. This data must cover the past three fiscal years.
The Five Tables in Item 20
Table 1: Systemwide Outlet Summary
Total outlets at the start and end of each year for the last three years, broken down by franchised, company-owned, and total.
Table 2: Transfers
Number of franchised outlets transferred to new owners each year, by state. High transfer numbers may indicate franchisees wanting to exit.
Table 3: Status of Franchised Outlets
Detailed breakdown by state showing: outlets at start of year, opened, terminated, non-renewed, reacquired by franchisor, ceased operations for other reasons, and outlets at end of year.
Table 4: Status of Company-Owned Outlets
Similar to Table 3 but for company-owned locations. Shows whether franchisor is growing or shrinking its corporate footprint.
Table 5: Projected Openings
Number of franchise agreements signed but not yet operational, and projected new franchised and company-owned outlets for the next fiscal year.
Franchisee Contact Lists
- Current franchisees: Names, addresses, and phone numbers of all franchisees as of the FDD date.
- Former franchisees: Contact info for franchisees who left the system in the past fiscal year (or statement that none left).
- Franchisee associations: If any independent franchisee association exists, its contact information must be disclosed.
Why Item 20 Is Critical for Franchise Buyers
Item 20 provides objective data about the franchise system's health that marketing materials and sales presentations will never reveal. The numbers tell the true story of franchisee success and system stability.
System Health Assessment
Net unit growth (or decline) over three years shows whether the system is healthy and attracting new franchisees.
Franchisee Satisfaction Indicator
High termination and transfer rates often indicate franchisee dissatisfaction, poor unit economics, or franchisor problems.
Due Diligence Resources
The franchisee contact lists provide direct access to people who can share real operational and financial experiences.
Territory Availability
State-by-state data helps you understand market saturation and availability in your target area.
Critical Insight
The franchisee contact list in Item 20 is the most valuable due diligence resource in the entire FDD. Successful franchise buyers contact 10-20 current and former franchisees before making their investment decision. Never skip this step.
How to Analyze Item 20 Data
Calculate Key Metrics
Net Unit Growth: (Units opened - Units closed) / Total units. Positive growth over 3 years is healthy.
Turnover Rate: (Terminations + Non-renewals + Reacquisitions + Ceased operations) / Total units. Under 5% annually is good; over 10% is concerning.
Transfer Rate: Transfers / Total units. High transfer rates may indicate franchisees trying to exit the system.
Company-Owned Trend: Is the franchisor growing or shrinking its corporate locations? Shrinking may indicate the franchisor prefers franchising risk to franchisees.
Analyze Three-Year Trends
Consistency: Look for consistent patterns. Sudden spikes in closures or terminations may indicate systemic problems.
Acceleration or Deceleration: Is growth speeding up or slowing down? Slowing growth may indicate market saturation.
Regional Patterns: Are problems concentrated in certain states? This may indicate regional market issues.
Projected vs. Actual: Compare previous years' projections (Table 5) to actual results. Large gaps suggest unrealistic projections.
Using the Franchisee Contact Lists
Select strategically: Contact franchisees in markets similar to yours, with varying tenure (new and experienced), and different performance levels if possible.
Contact former franchisees: Those who left often provide the most candid feedback. Ask why they exited and if they would do it again.
Ask about support: How responsive is the franchisor? Is training adequate? Are marketing programs effective?
Discuss financials: Ask about revenue, profitability, break-even time, and whether the business met their expectations.
The ultimate question: "Knowing what you know now, would you invest in this franchise again?"
Questions to Ask Current Franchisees
Financial Questions
- How long did it take to break even?
- Are you meeting your financial expectations?
- What are your actual ongoing costs (rent, labor, supplies, royalties)?
- Is the Item 19 data (if provided) representative of your experience?
Operations Questions
- How many hours per week do you work in the business?
- What are the biggest operational challenges?
- How difficult is hiring and retaining staff?
- Are the systems and processes provided by the franchisor effective?
Franchisor Support Questions
- How responsive is the franchisor when you need help?
- Was the initial training adequate?
- Are the marketing programs effective?
- Does the franchisor listen to franchisee feedback?
Red Flags in Item 20
Net Unit Decline
More closures than openings over three years is a major warning sign. The system is shrinking, often indicating fundamental problems.
High Turnover Rate
Annual turnover (terminations + ceased operations) exceeding 10% of system size suggests serious franchisee dissatisfaction or failure.
Franchisor Buying Back Units
Large numbers of "reacquired by franchisor" may indicate franchisees in distress or the franchisor absorbing failed units.
Large Former Franchisee List
Many franchisees leaving in a single year suggests systemic issues. Contact these former franchisees for insights.
Questions to Ask the Franchisor
- 1.What are the primary reasons for franchise terminations and closures in the past three years?
- 2.What support does the franchisor provide to struggling franchisees before termination?
- 3.Why are franchisees transferring their businesses? Are these profitable exits or distressed sales?
- 4.What is the typical resale value of a franchise in this system?
- 5.Is there an independent franchisee association or advisory council? What role do they play?
Frequently Asked Questions
What is FDD Item 20?
Item 20 provides detailed statistical information about the franchise system including: the number of franchised and company-owned outlets, openings and closings over the past three years, transfers, franchisee contact information, and a list of franchisees who left the system. This data reveals the true health and growth trajectory of the franchise.
Why is the franchisee contact list in Item 20 so important?
The franchisee contact list is arguably the most valuable resource in the entire FDD. These are real franchise owners you can contact to ask about their actual experience, financial performance, franchisor support quality, and whether they would make the investment again. Speaking with franchisees is essential due diligence.
What does a high turnover rate indicate?
High turnover (many terminations, non-renewals, or transfers relative to system size) can indicate franchisee dissatisfaction, financial struggles, or problematic franchisor relationships. However, some turnover is normal - look for patterns over the three-year period and compare to industry benchmarks.
Should I contact franchisees who left the system?
Absolutely. Item 20 must list franchisees who left in the past year. These former franchisees can provide candid insights about why they left, whether the business met expectations, and issues they experienced. Their perspective often differs from current franchisees who may be more positive.
What is a healthy growth rate for a franchise system?
Healthy growth varies by system maturity. Newer franchises may grow 20-50% annually, while mature systems might grow 5-10%. More important than growth rate is the net change: are more units opening than closing? Consistent net positive growth over three years is a good sign.