Understanding Item 20 of the Franchise Disclosure Document (FDD): What You Need to Know

When considering investing in a franchise, one of the most critical documents you’ll encounter is the Franchise Disclosure Document (FDD). The FDD provides detailed information about the franchise, helping potential franchisees make informed decisions. Among the various items in the FDD, Item 20 is particularly important because it offers insights into the franchise system’s growth, turnover, and overall health.

In this blog post, we’ll break down what Item 20 of the FDD covers, why it matters, and how you can use this information to evaluate a franchise opportunity.

What is Item 20 of the FDD?

Item 20 of the FDD provides information about the franchise system’s outlets and franchisee information over the past three years. This section is crucial for understanding the performance and stability of the franchise. It includes several key tables that show the growth, closures, transfers, and overall status of franchised and company-owned outlets.

Key Components of Item 20

Item 20 is structured into several tables, each providing specific information:

Table 1: Systemwide Outlet Summary
- This table provides a snapshot of the total number of franchised and company-owned outlets at the beginning and end of each year. It shows how many outlets opened, closed, or were transferred during the year.
- Why it matters: A growing number of outlets can indicate a healthy and expanding franchise system. Conversely, a high number of closures or transfers might raise red flags about the franchise’s stability.
Table 2: Transfers of Outlets
- This table details the number of outlets that were transferred from one franchisee to another. It shows how many transfers were initiated by the franchisor, franchisee, or a third party.
- Why it matters: Frequent transfers could indicate dissatisfaction among franchisees, or it could be a sign of a healthy resale market. Understanding the reasons behind transfers is essential.
Table 3: Status of Outlets
- This table breaks down the current status of all franchised and company-owned outlets, including whether they are still open, closed, or transferred.
- Why it matters: This table gives you a clear picture of the franchise’s current footprint. A stable number of open outlets is a positive sign, while a high number of closures may be concerning.
Table 4: Projected Openings
- This table provides information about projected new outlet openings for the upcoming year, including both franchised and company-owned locations.
- Why it matters: Planned growth can be a positive indicator of a franchise’s future potential. However, overly ambitious projections without a track record of successful openings may be a red flag.
Table 5: Franchisee Information
- This table includes contact information for current and former franchisees. It’s one of the most valuable resources for prospective franchisees because it allows you to reach out directly to those with firsthand experience.
- Why it matters: Speaking with current and former franchisees can provide valuable insights into the realities of operating a franchise. Ask about their experiences, challenges, and whether they would make the same investment again.

How to Use Item 20 in Your Evaluation

Understanding Item 20 is crucial for evaluating the health and viability of a franchise system. Here’s how to use this information:

Assess Growth and Stability: Look at the trends in the number of outlets over the past three years. Consistent growth can indicate a strong franchise system, while a pattern of closures or stagnant growth may be a warning sign.
Investigate Franchisee Turnover: High turnover rates, especially those involving closures rather than transfers, can be a sign of franchisee dissatisfaction. Consider the reasons behind these trends by speaking with current and former franchisees.
Analyze Projections vs. Reality: Compare the projected openings with actual growth in previous years. If a franchisor consistently meets or exceeds their projections, it’s a good sign they understand their market. If not, be cautious.
Contact Franchisees: Use the contact information in Table 5 to reach out to franchisees. Prepare questions about their experience with the franchisor, the level of support they’ve received, and any challenges they’ve faced.

Final Thoughts

Item 20 of the FDD is a powerful tool for evaluating a franchise opportunity. It offers a comprehensive view of the franchise’s growth, stability, and franchisee satisfaction. By carefully analyzing this section and speaking directly with franchisees, you can gain valuable insights that will help you make an informed investment decision.

Investing in a franchise is a significant commitment, and understanding the details provided in Item 20 can make a big difference in choosing the right opportunity. Always combine this analysis with professional advice and a thorough review of the entire FDD to ensure you have a complete understanding of the franchise you’re considering.