What does FDD Item 20 contain?

Item 20 contains five tables tracking franchise outlet activity over the past 3 fiscal years: (1) systemwide outlet summary, (2) transfers of outlets, (3) status of franchised outlets, (4) status of company-owned outlets, and (5) projected new franchised outlets. Together they show unit growth, franchisee departures, and system health.

What is a red flag in FDD Item 20?

Key red flags in Item 20 include: termination rate above 5% annually, total outlets declining year-over-year, high ratio of transfers relative to total units (may signal franchisees selling at a loss), and non-renewals exceeding new openings. Any of these patterns warrants deep investigation before proceeding.

What is the difference between a termination and transfer in Item 20?

A termination means the franchise agreement was ended — often involuntarily — by the franchisor. A transfer means the franchisee sold their unit to another buyer (with franchisor approval). High terminations suggest the franchisor is actively removing struggling franchisees. High transfers may indicate franchisees choosing to exit voluntarily.

How do I calculate the annual termination rate from Item 20?

Divide the number of terminations in a given year by the total units at the start of that year. For example, if a system had 500 units and 30 terminations, the termination rate is 6%. Compare this across all 3 years in Item 20 to see if the trend is improving or worsening.

Should I call franchisees who transferred or left the system?

Absolutely. Item 20 includes contact information for franchisees who left the system in the past fiscal year. These former franchisees are often the most candid sources of information — they have no ongoing relationship with the franchisor and nothing to lose by being honest about why they left.

FDD Analysis

FDD Item 20 Decoded: What Outlet Transfers and Terminations Reveal About a Franchise System

Of the 23 items in a Franchise Disclosure Document, Item 20 is the most systematically underused. Most buyers skim it. Sophisticated buyers — franchise attorneys, PE-backed acquirers, and operators who've been burned before — read it first. Here's what they're looking for.

The Five Tables of Item 20

Item 20 requires franchisors to disclose five years of outlet activity data across five separate tables. Taken together, they tell you whether this franchise system is growing, stable, or quietly falling apart.

Table 1: Systemwide Outlet Summary

Total franchised units, company-owned units, and total outlets at the start and end of each of the past 3 fiscal years. This is your 30-second health check: is the system growing, flat, or shrinking?

Table 2: Transfers of Outlets

How many existing franchisees sold their units to new buyers (with franchisor approval). High transfer volume relative to unit count can signal franchisees eager to exit — worth investigating why.

Table 3: Status of Franchised Outlets

The most important table. Shows openings, closures, terminations, non-renewals, reacquired by franchisor, and ceased operations for each year. This is where you find out how many franchisees actually left and how.

Table 4: Status of Company-Owned Outlets

Tracks the franchisor's own locations. If the franchisor is closing company stores while franchisees are opening — or vice versa — that asymmetry warrants explanation.

Table 5: Projected New Outlets

Signed agreements for new franchised locations. Compares what was projected last year vs. what actually opened. A big gap between projected and actual is a yellow flag for sales pipeline problems.

The Math That Matters: Termination Rate

Take Table 3 and calculate the annual termination rate: terminations ÷ total units at year start. Do this for all three years. A healthy franchise system has a termination rate below 2-3%. Above 5% annually means roughly 1 in 20 franchisees is being forced out each year — that's a high-churn system. Above 10% is a serious red flag.

Equally important: what is the ratio of terminations to non-renewals? Terminations are typically involuntary (the franchisor ends the relationship). Non-renewals may be voluntary (the franchisee chose not to renew). A system with mostly non-renewals but few terminations tells a different story than the reverse. Use our 59-point due diligence checklist to track all of this →

Red Flags in Item 20

CriticalDeclining total unit count year-over-year

HighTermination rate above 5% annually

HighReacquisitions by franchisor spiking (buying back troubled units)

MediumTransfers exceeding 10% of system annually

MediumProjected vs. actual openings gap greater than 40%

HighCeased operations significantly higher than average years

What Good Looks Like

A healthy Item 20 shows consistent unit growth year-over-year, termination rates below 2%, transfer activity consistent with a mature system where franchisees sell at a profit (not a loss), and projected openings that roughly match actuals from the prior year. Systems with these characteristics tend to have the lowest SBA default rates in our database.

The most important validation step: call the former franchisees. Item 20 must disclose contact information for every franchisee who left the system in the past fiscal year. These are your most valuable sources. They've already made their decision — they have nothing to lose by telling you why. Browse franchise data in our database →

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FDD Item 20 Decoded: What Outlet Transfers and Terminations Reveal About a Franchise System

The Five Tables of Item 20

The Math That Matters: Termination Rate

Red Flags in Item 20

What Good Looks Like

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