Item 20 disclosures are the section of the Franchise Disclosure Document that reports statistical information about a franchise system’s outlets. Prospective franchisees often skim past Item 20 disclosures in favor of more marketing-friendly sections of the FDD, but the numbers reported there can reveal more about a franchise system’s health than almost any other part of the document.
What Item 20 Discloses
Item 20 disclosures report the number of franchised and company-owned outlets at the start and end of each of the past three years, along with how many outlets were opened, closed, transferred, reacquired by the franchisor, or terminated during that period. This data is organized state by state, giving a prospective franchisee a way to see recent activity in a specific region of interest rather than only a national total, which can look very different once the regional detail is separated out from the combined figure. A national total showing modest net growth can mask a region where the system is actually shrinking.
What the FDD Requires Item 20 to Include
Item 20 disclosures also require the franchisor to list contact information for current franchisees and, in many cases, franchisees who left the system within a recent period. This allows a prospective buyer to speak directly with people who have operated under the brand, rather than relying solely on information provided by the franchisor itself, and following up with even a handful of these contacts is often one of the more informative steps in evaluating a system.
The FDD’s Item 20 disclosures may also note whether current or former franchisees have signed agreements restricting their ability to discuss their experience publicly. This connects directly to the kind of non-disparagement provisions covered in other agreement terms, since a franchisor is generally required to flag when such restrictions exist among the franchisees a prospective buyer might otherwise contact, which affects how candid those conversations are likely to be.
What Franchisees Often Overlook
Franchisees and prospective buyers often overlook how much a pattern of closures or transfers across multiple states can say about a system, focusing instead on the total outlet count alone. A system that opened many new locations while also losing a significant number to closure or transfer in the same period tells a different story than one with the same total growth and minimal turnover. Reading the state-by-state breakdown in the Item 20 disclosures, rather than just the summary figures, often surfaces regional trends that a single national number would hide entirely.
It is also easy to overlook the distinction between a closure and a transfer within Item 20 disclosures. A transfer means the outlet continued operating under new ownership, while a closure means the location stopped operating entirely. A system with many transfers but few true closures may simply have an active resale market among existing franchisees, while frequent closures can point to underlying struggles with the business model in certain markets or regions, particularly when the pattern repeats across more than one reporting year.
Key Questions to Consider About Item 20 Disclosures
Before relying on Item 20 disclosures alone, a few questions are worth asking. How does the ratio of closures to total outlets compare across the three years reported? Does one state or region show a disproportionate share of closures or transfers compared to the system as a whole? How many of the listed franchisee contacts are still reachable, and what do they say about their experience? Has the franchisor been required to reacquire an unusual number of outlets, and if so, does the disclosure offer any explanation for the pattern? Is the trend consistent across each of the three reported years, or concentrated in just one?
Summary
Item 20 disclosures report outlet counts, transfers, closures, terminations, and franchisee contact information for the past three years, broken down by state. This data can reveal patterns, such as concentrated closures in specific regions, that a simple growth number would not show on its own. Item 20 disclosures also flag whether franchisees have signed agreements restricting public discussion of their experience, which affects how useful the contact list actually is. Reviewing this section closely, rather than treating it as a formality, gives a prospective franchisee a clearer picture of what a system’s track record actually looks like.
FDD sections vary in how much detail they provide, and the specific disclosures in any Item 20 will determine what conclusions can reasonably be drawn. If you have questions about reviewing an FDD in general, you are welcome to reach out to the team at FortmanSpann.
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