May 14, 2021 - Blog, Franchise Articles by |

Item 20 of the Franchise Disclosure Document (FDD) provides an overview of the status of a franchise system. Its tables disclose the number of active franchises, terminations, non-renewals and closures over the past three years, as well as the number of franchisees who have signed agreements but not yet opened and the franchisor’s projections for the upcoming year. These are all valuable pieces of information, and they allow prospective franchisees to gain some important insights with the help of an experienced franchise lawyer.

Growth, Turnover and Terminations

Three of the most important pieces of information that prospective franchisees can take away from Item 20 are the franchisor’s growth rate, turnover rate and termination rate. These are important for different reasons.

In general, a positive growth rate is a good sign. It suggests that more franchises are opening than closing and that new franchisees are continuing to see value in the franchise system. But, the growth rate alone doesn’t tell the whole story. If a franchise system has a high turnover rate, this may suggest that the franchisor focuses on selling new franchises rather than supporting its existing franchisees. If a franchise system has a high termination rate, this may suggest that the franchisor has little patience for franchisees who are unable to find success or who do not strictly adhere to the franchisor’s standards.

Since Item 20 provides three years’ worth of data, franchisees can also examine a franchisor’s growth, turnover and termination rates over time. If a franchisor’s turnover or termination rate is consistently high (or has increased over the past three years), this may be a bad sign. Conversely, if Item 20 shows steady growth with relatively little turnover (including only a small percentage of terminations, non-renewals, and franchisees who “ceased operations for other reasons”), this may point to a healthy franchise system.

Pending and Projected Franchise Openings

The lists of pending and projected franchise openings in Item 20 can provide prospective franchisees with useful information as well. Prospective franchisees should check whether these lists are consistent with the franchisor’s growth figures for the last three years and inquire regarding any disparities.

If the lists show higher-than-normal numbers, is this because the franchisor is making a push for growth? If so, is it emphasizing growth in certain geographic regions? Or, could this be a sign that a significant percentage of prospects sign franchise agreements but never open for business? These, obviously, are very different situations, and they can provide very different perspectives on the viability of a franchise opportunity.

Of course, Item 20 is just one source of information about franchise opportunities. Prospective franchisees should read the FDD in its entirety, conduct thorough due diligence, and hire a franchise lawyer to review (and potentially negotiate) the franchise agreement.

Contact National Franchise Lawyer Jeffrey M. Goldstein

Are you thinking about buying a franchise? Our firm provides four tiers of fixed-fee franchise business review programs for prospective franchisees. To learn more from national franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or inquire online today.

Lawyer USA

Antitrust and Franchise Law Firm of the Year in DC

Lawyer USA

Leading Professionals in Law

Lawyer USA

Franchise Law
in the District of Columbia

Lawyer USA

Franchise Law Firm
of the Year – USA

Lawyer International

Lawyer International
Legal 100
2018

Lawyer International

Lawyer International
Legal 100
2019

ACQ5 LAW AWARDS 2019

US (New York)
Franchise Lawyer
of the Year
ACQ5 GLOBAL AWARDS 2019, JEFF GOLDSTEIN, GOLDSTEIN LAW FIRM, PLLC

ACQ5 LAW AWARDS 2019

US (New York)
Franchise Law Firm
of the Year
ACQ5 GLOBAL AWARDS 2019, GOLDSTEIN LAW FIRM, PLLC

Lawyers of Distinction logo

2020 Power Lawyers

Esteemed Lawyers of America Logo

Esteemed Law Firm Complex Litigation

Global Law Experts Logo

Recommended Firm in Franchise Litigation

Who's Who Attorney Logo

Top Attorney USA – Litigation

Avvo Franchise Lawyer Symbol

Superior Attorney in Franchising

Avvo Franchise Lawyer Symbol

Superior Attorney in Antitrust

Finance Monthly Global Award Winner Logo

Franchise Law Firm of the Year

Lead Counsel logo

Chosen Law Firm for Commercial Litigation

BBB of Washington DC

A+ Rated

Washington DC Chamber of Commerce

Verified Member

Lawyers of Distinction logo

Franchise Law Firm of the Year

ISSUU

Best Law Firm for Franchise Disputes in 2017

Law Awards Finanace Monthly

Franchise Law Firm of the Year - 2017

Top Franchise Litigator for Franchisees and Dealers

Top Franchise Litigator for Franchisees and Dealers

2017 Finance Monthly Award

2017 Finance Monthly Award

ACQ5 LAW AWARDS 2018

Franchise Law Firm
of the Year
ACQ5 LAW AWARDS 2018

ACQ5 LAW AWARDS 2019

Franchise Law Firm
of the Year
ACQ5 LAW AWARDS 2019

Franchise Law Firm of the Year

Franchise Law Firm of the Year

Franchise Law Firm of the Year

Franchise Law Firm of the Year
Global Awards 2017

Global Law Experts

Franchise Law Firm
of the Year
in New York – 2019

Finance Monthly Law Awards - 2018

Finance Monthly Law Awards - 2018

Franchise Law Firm of the Year

Franchise Law Firm
of the Year
Global Awards 2018

Contact Us

Goldstein Law Firm, PLLC

1629 K St. NW, Suite 300,
Washington, DC 20006

Phone: 202-293-3947
Fax: 202-315-2514

Free Consultation

Free Consultation