What FDD Item 20 Actually Reveals
Most prospective franchisees focus their FDD research on fees (Items 5–7), earnings claims (Item 19), and financial statements (Item 21). Item 20 gets less attention — which is a mistake. It may be the single most objective section in the entire document. Whether you're buying a single unit or planning a multi-unit franchise portfolio, Item 20 is where the system's real story lives.
While other sections contain what the franchisor says about their system, Item 20 contains what actually happened — in numbers, by state, by year. How many franchisees opened? How many closed? How many were terminated by the franchisor? How many walked away when their agreements expired? How many sold to other franchisees — and how many tried to sell but couldn't?
The FTC's Franchise Rule requires franchisors to disclose this data covering the three most recent fiscal years, broken down by state. This gives you three full years of system behavior to analyze — enough to identify trends, not just snapshots.
The Core Question Item 20 Answers:
What percentage of franchisees who enter this system are still operating — and thriving — three years later? And when people leave, why do they leave?
How to Read the Five Tables in Item 20
Item 20 is organized into five distinct data tables. Each tells a different part of the system's story. Here's what each table contains and the questions it helps answer:
Systemwide Outlet Summary
The top-level view: total outlets open at start of year, opened during year, closed during year, and open at end of year — for both franchised and company-owned outlets. This is your first read on whether the system is growing, flat, or shrinking.
→Is the net unit count growing year over year?
→Are openings consistently outpacing closings?
→What's the ratio of franchised to company-owned units? (High company-owned % may indicate franchisees aren't renewing)
Transfers of Outlets
Tracks how many existing franchise agreements were transferred from one franchisee to another, broken down by state and year. Transfers represent resale activity — franchisees selling their locations to buyers.
→High transfer volume can indicate an active resale market (positive) or franchisees eager to exit (negative)
→Are transfers concentrated in specific states? That may signal regional performance issues
→Are transfers increasing over time? Combine with termination data to understand the full exit picture
Status of Franchisee-Owned Outlets
The most detailed table: for each state, shows outlets open at year start, new openings, terminations, non-renewals, reacquisitions by franchisor, closures for other reasons, and outlets open at year end. This is where the most granular analysis happens.
→What's the termination count vs. total outlets? Calculate the annual termination rate
→How many non-renewals occurred? This is the franchisor not re-signing existing franchisees
→How many were 'reacquired by franchisor'? This may indicate franchisees in distress
→What's the 'ceased operations — other reasons' count? Voluntary closures often hide underperformance
Status of Company-Owned Outlets
Shows the same data as Table 3 but for outlets the franchisor owns and operates directly. Changes in company-owned unit count reveal how the franchisor bets its own capital.
→Is the franchisor growing or shrinking its own company-owned portfolio?
→Are company-owned locations being sold to franchisees (conversions)? This can be positive or it can be the franchisor offloading underperforming units
→Does the franchisor operate any units itself? Zero company-owned units isn't necessarily bad, but it means they don't 'eat their own cooking'
Projected New Openings
The franchisor's projection of new franchised and company-owned outlet openings in the coming fiscal year, broken down by state. This is forward-looking and based on signed agreements, not guarantees.
→How does the projection compare to actual openings in prior years? Consistently missing projections is a yellow flag
→Where is growth planned? Heavy concentration in your state increases competition risk
→Are there signed franchise agreements pending opening in your proposed territory?
Item 20 Red Flags: What Should Concern You
Not all red flags are obvious. Some of the most dangerous patterns in Item 20 require combining data across tables and years before they become visible. For a comprehensive look at warning signs across all 23 FDD items, see our complete FDD red flags guide. Here are the Item 20–specific signals most franchise buyers miss:
System Size Is Shrinking
The most straightforward red flag: more outlets closing than opening, year over year. Calculate this from Table 1. A system that opened 30 locations but closed 45 last year is net-negative — it's contracting. One bad year can be explained away; two or three consecutive net-negative years indicate structural decline. Pair this with Table 3 to understand whether closures are voluntary exits, terminations, or non-renewals.
High Termination Rate Relative to System Size
Terminations appear in Table 3 and represent franchisees the franchisor forced out. A healthy system should terminate fewer than 2–3% of its units annually. Calculate: terminations ÷ average units open during the year. A 200-unit system terminating 15 franchisees per year has a 7.5% annual termination rate — far above average and worth investigating aggressively. Ask the franchisor directly why each termination occurred.
Geographic Concentration in One or Two States
Item 20 tables are broken out by state — use that. A system with 150 units where 120 are in Texas and California isn't a national brand; it's a regional one. Heavy concentration creates exposure: regional economic downturns, changes in state regulations, or competition from local alternatives can devastate a system that lacks diversification. If you're investing in a non-dominant state, ask why growth has been so uneven.
Rising Non-Renewals Alongside Flat Openings
Non-renewals (Table 3) represent franchisees whose agreements expired and weren't renewed — by the franchisor's choice. If non-renewals are rising while new openings hold flat, the system is quietly shrinking its franchisee base without showing obvious closures. Some franchisors use non-renewals to cull underperformers, but rising non-renewal rates can also signal franchisees who were not generating enough royalties to warrant renewal support.
Franchisor Reacquiring Large Numbers of Outlets
'Reacquired by franchisor' entries in Table 3 indicate outlets the franchisor bought back — often from franchisees in default or financial distress. A handful per year in a large system is normal. But 10+ reacquisitions per year in a 100-unit system suggests the franchisor is absorbing failing locations at scale. This puts financial and operational strain on the franchisor and may explain deteriorating financial statements in Item 21.
Projections Consistently Exceed Reality
Compare Table 5 projections from prior-year FDDs to actual openings in the following year's Table 3. Franchisors that repeatedly project 40 new openings but deliver 12 aren't reliable growth forecasters — and may be using inflated projections to build sales momentum with prospective franchisees. This takes some work (you need prior-year FDDs), but FranchiseIQ can pull this data instantly if you upload multiple FDD versions.
Green Flags: What Healthy Outlet Data Looks Like
Strong Item 20 data doesn't just mean "no red flags" — it tells a positive story about system health, franchisee satisfaction, and sustainable growth. Here's what to look for:
Steady, Consistent Unit Growth
New openings consistently outpacing closures year over year — without wild swings. Sustainable growth (10–20% per year) is more meaningful than a single spike year.
Low Churn Rate
Total exits (terminations + non-renewals + voluntary closures) below 5% of the system annually, with terminations below 2%. Low churn suggests franchisees are succeeding and staying.
Geographic Diversification
Units spread across multiple states and regions — not concentrated in two or three markets. Diversification signals brand appeal beyond a founder's home state and protects against regional shocks.
Active Transfer Market
Meaningful transfer volume (Table 2) indicates franchisees can successfully resell their locations — which means there's an exit path for you when the time comes. Transferability is a form of liquidity.
Accurate Opening Projections
Table 5 projections that are within 20% of actual Table 3 outcomes demonstrate management credibility and pipeline discipline. Franchisors who consistently hit their targets run a tighter operation.
Growing Company-Owned Portfolio
A franchisor investing its own capital into company-owned units signals belief in the model's unit economics. They're eating their own cooking — a positive alignment of incentives.
How to Calculate Franchisee Survival Rate from Item 20 Data
The franchisee survival rate is one of the most useful metrics you can derive from Item 20 — and it's rarely stated directly in the FDD. You have to calculate it yourself from the tables. Here are two methods, from simple to more precise:
Method 1: Simple 3-Year Net Survival
(Units Open at End of Year 3) ÷ (Units Open at Start of Year 1) × 100 = 3-Year Survival %
Pull the system-wide totals from Table 1. Find units open at the start of the earliest year disclosed, and units open at the end of the most recent year. Divide and multiply by 100.
Example:
Year 1 start: 180 units open
Year 3 end: 162 units open
162 ÷ 180 = 90% → 3-year system survival rate of 90%
Note: This measures system size retention, not individual franchisee survival — transfers and new openings affect the number.
Method 2: Cohort Exit Rate (More Precise)
Total Exits (All Reasons) ÷ Average Units Open × 100 = Annual Exit Rate
From Table 3, sum all exit reasons for each year: terminations + non-renewals + reacquisitions + ceased operations (other). Divide by average units open that year. This gives you an annual churn rate. Compound it over three years for a survival probability.
Example:
200-unit system: 6 terminations + 3 non-renewals + 2 reacquisitions + 4 other = 15 total exits
15 ÷ 200 = 7.5% annual exit rate
3-year survival estimate: (1 − 0.075)³ = ~78%
Benchmark: Above 85% over 3 years is strong. Below 70% warrants significant scrutiny.
Neither method is perfect — both are affected by the mix of voluntary exits, forced terminations, and system growth rate. But even rough survival estimates give you a data-anchored starting point for your conversations with current and former franchisees. When you call the Item 20 contact lists, you'll know what questions to ask.
Questions to Ask Franchisees Found in the Item 20 Contact Lists
Item 20 requires franchisors to attach a complete list of current franchisees (name, address, phone number) as well as a list of franchisees who exited the system in the prior fiscal year. These lists are gold. They give you direct access to people who have lived the franchise experience — good and bad.
Franchisors cannot legally restrict franchisees from speaking with prospective buyers. Call at least 10–15 current franchisees and 3–5 former franchisees. Here's what to ask:
📞 For Current Franchisees
- →Are you hitting the earnings projections you expected when you signed?
- →How responsive is the franchisor support team when you need help?
- →If you could go back, would you invest in this franchise again?
- →What do you wish you had known before signing?
- →Have you seen the marketing fund used effectively?
- →How much are you actually working per week, and what does your take-home look like?
- →Are there franchisees in your network who are struggling? What's driving that?
- →Has the franchisor made any changes recently that affected your business — positively or negatively?
📴 For Former Franchisees
- →Why did you leave the system? Was it voluntary or forced?
- →Did you receive support from the franchisor when you were struggling?
- →Were you profitable at the time you exited?
- →Would you describe your exit as fair or adversarial?
- →Were there issues with the franchisor that weren't disclosed before you signed?
- →What would you tell a prospective franchisee considering this brand?
- →Were you able to sell your location, or did you walk away?
Pro tip:
Don't just call franchisees in your proposed territory. Call franchisees in similar markets (comparable population size, demographics, competition). Regional performance can vary widely — a franchise that thrives in suburban Southeast markets may struggle in dense Northeast urban corridors. The Item 20 state-level breakdown lets you find the most comparable comparable operators to your situation.
How Item 20 Connects to the Rest of Your FDD Analysis
Item 20 data is most powerful when cross-referenced with other sections of the FDD. Here are the most important combinations:
Item 20 + Item 19 (Earnings Claims)
If Item 19 shows strong average unit volumes but Item 20 shows high termination rates, ask why. High-earning systems shouldn't have high churn. Either the earnings data is skewed by survivor bias (only profitable units reported), or something else is driving exits. This discrepancy is one of the most valuable signals a combined analysis surfaces.
Read the FDD Item 19 guide →Item 20 + Item 21 (Financial Statements)
Declining system size in Item 20 should show up in Item 21 as declining royalty revenue. If unit count is falling but royalty revenue is growing, the surviving units may be performing better — or the franchisor changed royalty rates. These two sections should tell a consistent story; contradictions require explanation.
Read the FDD Item 21 guide →Item 20 + Item 12 (Territory Rights)
Table 5 projected openings by state combined with Item 12 territory definitions tells you how crowded your market may become. If 20 new units are projected in your state and Item 12 provides limited territory protection, you could face encroachment within 2–3 years of opening.
Read the FDD Item 12 guide →Frequently Asked Questions
What does FDD Item 20 include?
FDD Item 20 requires franchisors to disclose five tables of outlet data for each of the three most recent fiscal years, broken down by state. The tables cover: (1) system-wide summary of franchise outlet openings and closings, (2) transfers of outlets between franchisees, (3) status of franchisee-owned outlets (open at start, opened, closed, end count), (4) status of company-owned outlets, and (5) projected new openings for the next fiscal year. Together, these tables paint a complete picture of how the franchise network is growing, shrinking, and churning.
What is a healthy franchisee termination rate?
There is no universal benchmark, but most healthy franchise systems show annual termination rates below 2–3% of the total system. For context: if a 200-unit system terminates 10 franchisees per year, that's a 5% annual termination rate — elevated and worth investigating. Systems with high termination rates relative to openings may be burning through franchisees faster than they recruit them, which is unsustainable. Always compare terminations to the size of the system, not in absolute numbers alone.
How do I calculate franchisee survival rate from Item 20?
To calculate a basic survival rate: add up all outlets that opened over the past three years from the Item 20 tables, then subtract the outlets that closed (for any reason — termination, non-renewal, transfer out, or voluntary closure) over the same period. Divide surviving outlets by total opened to get a rough 3-year survival percentage. A more precise method uses cohort tracking: identify how many outlets were open at the start of the three-year window and count how many are still open at the end. This requires combining Table 1 and Table 3 data. Survival rates above 85% over three years are generally positive; below 70% warrants serious scrutiny.
What's the difference between a termination and a non-renewal in Item 20?
A termination means the franchisor ended the franchise agreement before its natural expiration — typically due to a franchisee breach (failure to pay royalties, operational violations, abandonment). A non-renewal means the franchisor chose not to renew the agreement when it expired at its scheduled term end. Both represent exits where the franchisee is no longer in the system, but they signal different things: high terminations suggest franchisees are defaulting or being forced out mid-term, while high non-renewals may indicate the franchisor is selectively pruning underperformers or that franchisees aren't meeting renewal standards. Either pattern deserves investigation.
Can I contact the franchisees listed in Item 20?
Yes — and you should. FDD Item 20 requires franchisors to provide a complete list of all current franchisees (with contact information) as well as a list of franchisees who left the system during the prior fiscal year. These contact lists are among the most valuable due diligence resources available. Call current franchisees to ask about unit economics, franchisor support quality, and whether they'd invest again. Call former franchisees (especially terminated ones) to understand why they left. Franchisors are legally prohibited from restricting franchisees from talking to prospective buyers. If a franchisor discourages you from making these calls, treat that as a significant red flag.
Let FranchiseIQ Crunch Your Item 20 Data
Upload your FDD and FranchiseIQ will instantly calculate termination rates, survival estimates, geographic concentration, and projection accuracy — plus flag every red flag across all 23 items in plain English. You can also use our franchise investment calculator to model the full cost of entry alongside your Item 20 analysis.
Analyze My FDD → FreeRelated Guides
FDD Item 19 Earnings Claims
How to read, verify, and use financial performance representations before signing.
FDD Item 21 Financial Statements
How to read the auditor opinion, balance sheet, and cash flow statement for red flags.
FDD Item 12 Territory Rights
Exclusive vs. protected vs. open territory — and what encroachment risk looks like.