If you flip through a typical Franchise Disclosure Document (FDD), most of what you will find is page after page of small, dense text that was clearly written by an attorney. However, things change (briefly) when you get to Item 20. In Item 20, franchisors are required to produce a series of five standardized tables that provide historical information, current information and future projections about the size and growth of the franchise system.
Carefully reviewing the data in Item 20 can tell you a lot about a franchise system. Has it grown consistently over the past three years? Have franchisees been leaving the system on a regular basis? Is the franchisor focused on expanding through franchising or company-owned outlets? You can gain insight into these issues and more through Item 20 of the FDD.
Breaking Down Item 20 of the Franchise Disclosure Document (FDD)
1. Systemwide Outlet Summary
The first table in Item 20 is labeled, “Systemwide Outlet Summary,” and it simply compiles data from tables three and four. Here you will find:
- The total size of the franchise system (including franchised and company-owned outlets)
- The net change in franchised outlets for each of the past three years
- The net change in company-owned outlets for each of the past three years
All of this information is important for assessing the health of the franchise system as a whole, and the later tables provide information that is specific to your state.
2. Transfers of Outlets from Franchisees to New Owners (other than the Franchisor)
Table No. 2 provides three years of historical data regarding franchise transfers. If franchisees are selling their businesses at a high rate, this could suggest that they are building profitable businesses that are attractive on the resale market. Or, it could mean that they are looking for any way out.
3. Status of Franchised Outlets
Table No. 3 provides three years of historical data regarding franchise openings, closings, terminations and non-renewals. This information is provided on a state-by-state basis and in aggregate for the entire franchise system. While interpreting the data in Table No. 3 is fairly straightforward, one particular column to note is the one labeled, “Ceased Operations-Other Reasons.” In most cases, this refers to franchisees who closed because they were unable to turn a profit.
4. Status of Company-Owned Outlets
Table No. 4 is similar to Table No. 3, but provides data regarding the franchisor’s company-owned outlets.
5. Projected Openings As Of [Last Day of Last Fiscal Year]
In Table No. 5, franchisors are required to disclose:
- The number of franchisees who have signed franchise agreements but who have not yet opened for business;
- The number of projected franchise openings for the next fiscal year; and,
- The number of projected company-owned outlet openings for the next fiscal year.
Since the FDD you receive will be inherently outdated, you can use these projections to inquire about the current status of the franchise system. How many franchisees who signed agreements have now opened? Did any fail to open? Is the franchisor on track to meet its opening projections?
6. Post-Table Disclosures
At the end of the tables in Item 20, franchisors must also disclose, (i) “the names of all current franchisees [or a minimum of 100] and the address and telephone number of each of their outlets;” and, (ii) “the name, city and state, and current business telephone number, or if unknown, the last known home telephone number of every franchisee who had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently completed fiscal year.”
In many ways, this is the most important part of Item 20, as it gives prospective franchisees critical information for conducting their due diligence.
Fixed-Fee Franchise Opportunity Reviews for Prospective Franchisees
If you are considering a franchise opportunity, it is important that you hire an experienced attorney to review your FDD and franchise agreement. At the Goldstein Law Firm, we have over 30 years of experience representing new and existing franchisees. To inquire about our services, please call (202) 293-3947, or send us your contact information and we will be in touch as soon as possible.