Item 20 of the FDD: How to Read Franchise Unit Data Like a Pro

Why Item 20 Is the Most Valuable Part of the FDD

Most prospective franchise buyers focus on Item 7 (costs) and Item 19 (earnings). Those are important, but Item 20 is arguably the single most actionable section of the entire Franchise Disclosure Document — and it’s the one most buyers skim over.

Item 20 contains two critical things:

1. A statistical table showing unit openings, closures, terminations, transfers, and total operating units for the past three fiscal years
2. A complete contact list of every current and former franchisee in the system

The statistical table tells you whether the franchise system is healthy and growing. The contact list gives you the phone numbers to verify everything the franchisor has told you. Together, they form the backbone of your due diligence.

Understanding the Item 20 Tables

Item 20 typically includes five tables covering a three-year period. Here’s what each one reveals:

Table 1: Systemwide Outlet Summary

This table shows the total number of franchised and company-owned outlets at the start and end of each fiscal year, along with the net change.

Year	Start of Year	End of Year	Net Change
2023	750	810	+60
2024	810	849	+39
2025	849	920	+71

What to look for: Consistent year-over-year growth is the strongest positive signal. Flat or declining total counts warrant investigation.

Table 2: Transfers

This table shows how many franchise units changed ownership during each year — meaning one franchisee sold to another.

Why it matters: A high transfer rate can mean:

• Franchisees are cashing out at a profit (positive)
• Franchisees are exiting because they’re unhappy (negative)
• The brand has an active resale market (generally positive)

The transfer number alone doesn’t tell you which scenario applies. You need to call transferring franchisees to understand their reasons.

Table 3: Status of Franchised Outlets

This is the most important table in Item 20. It breaks down exactly what happened to franchise units during each fiscal year:

Category	What It Means	What It Signals
Outlets at Start of Year	Units operating on January 1	Baseline
Outlets Opened	Brand new units that opened	Growth and demand
Terminations	Franchisor ended the agreement	Possible conflict or non-compliance
Non-Renewals	Franchisee chose not to renew	Potential dissatisfaction
Reacquired by Franchisor	Corporate bought back the unit	Could signal strategic shift or struggling unit
Ceased Operations (Other)	Closed for any other reason	Catch-all for failures
Outlets at End of Year	Units operating on December 31	Current health

Real-World Example: What Healthy Growth Looks Like

Here’s what the numbers look like for a franchise system with strong fundamentals — based on patterns we see in our database of 1,609 FDDs:

Healthy system:

• 318 units opened, 5 closed = 98.4% retention
• Closures represent less than 1% of the total system
• Steady or accelerating openings over three years
• Few or no terminations (franchisor isn’t forcing people out)

Concerning system:

• 14 units opened, 101 closed = significant net decline
• Closures represent nearly 10% of the total system
• Declining openings over three years
• Multiple terminations and non-renewals

Using Our Database to Check Growth

Our analysis of 1,609 franchise systems reveals wide variation in unit health:

Growth Pattern	Example	Opened	Closed	Net
Strong growth	Jersey Mike’s	318	5	+313
Moderate growth	Scooter’s Coffee	99	20	+79
High churn	Coverall	526	446	+80
Net decline	Applebee’s	0	82	-82
Severe decline	Chem-Dry	14	101	-87

The Contact List: Your Most Powerful Due Diligence Tool

The second half of Item 20 provides contact information for:

1. Every current franchisee — Name, business address, and phone number for every operating unit in the system
2. Former franchisees — Contact information for franchisees who left the system (through termination, non-renewal, or voluntary exit) during the most recent fiscal year

How to Use the Current Franchisee List

You should contact a minimum of 15-20 current franchisees before making your decision — this is the franchise validation process in action. When selecting who to call:

• Pick randomly — Don’t rely on the franchisor’s recommended “validation” list. Pick names directly from Item 20.
• Diversify by geography — Call franchisees in different states and markets to control for local economic conditions.
• Diversify by tenure — Talk to both new franchisees (1-2 years) and veterans (5+ years).
• Call your proposed territory neighbors — If you know your target territory, call franchisees in adjacent territories.

How to Use the Former Franchisee List

Former franchisees are often more candid than current ones because they have no ongoing relationship with the franchisor to protect. They can tell you:

• Why they left the system
• Whether the financial projections were accurate
• How the franchisor handled disputes or difficulties
• Whether they would invest in the franchise again

Pro tip: If the Item 20 former franchisee list is unusually long relative to the system size, that’s a red flag worth investigating.

Calculating Key Metrics from Item 20

You can derive several important metrics from Item 20 data:

Franchisee Retention Rate

Formula: (Units at End of Year - Units Opened) / Units at Start of Year x 100

A retention rate above 95% is strong. Below 90% warrants concern. Below 85% is a significant red flag.

Annual Growth Rate

Formula: (Units at End of Year - Units at Start of Year) / Units at Start of Year x 100

Compare this to the industry average and the franchise’s own historical trend. Accelerating growth is more promising than decelerating growth, even if the absolute numbers are similar.

Turnover Rate

Formula: (Terminations + Non-Renewals + Reacquisitions + Ceased Operations) / Units at Start of Year x 100

This captures all the ways franchisees leave the system. A turnover rate above 10% per year means the franchise is losing one in ten operators annually — a rate that should prompt serious questions.

Closure-to-Opening Ratio

Formula: Total Closures / Total Openings

• Below 0.1 (less than 10%) = Excellent. Very few closures relative to openings
• 0.1 to 0.3 (10-30%) = Normal. Some churn is expected in any system
• 0.3 to 0.5 (30-50%) = Concerning. Significant churn that warrants investigation
• Above 0.5 (over 50%) = Red flag. More than half of what’s built is being lost

Red Flags in Item 20

Here are the warning signs to watch for when reviewing Item 20:

1. Declining Total Units Over Three Years

If the system had 500 units three years ago and now has 420, the franchise is shrinking. That doesn’t necessarily mean it’s a bad business, but you need to understand why.

2. High Termination Counts

Terminations mean the franchisor ended the franchise agreement — often for non-compliance, failure to pay royalties, or breach of contract. A few terminations are normal. A pattern of double-digit terminations suggests the franchisor is either poorly selecting franchisees or has an adversarial relationship with its network.

3. Large Gap Between Openings and Operating Units

If a franchise reports opening 50 units per year for three years (150 total) but only has 120 operating units, that means 30 units from recent openings have already failed. New unit failure is the most damaging signal in franchise data.

4. Missing or Incomplete Contact Information

The FTC requires complete contact information in Item 20. If phone numbers are missing, addresses are incomplete, or the list seems suspiciously short, the franchisor may not be in full compliance — a red flag on its own.

5. The “Do Not Contact” Clause

Some franchisors include language in their agreements restricting franchisees from speaking negatively about the brand. While they can’t legally prevent you from contacting franchisees listed in Item 20, any sign of communication suppression should raise concerns.

Item 20 in Practice: A Step-by-Step Approach

Here’s how to systematically analyze Item 20 for any franchise you’re evaluating:

Step 1: Calculate the three-year net unit trend (growing, flat, or shrinking?)

Step 2: Calculate the retention rate and turnover rate for each year

Step 3: Look for acceleration or deceleration in openings

Step 4: Count terminations and non-renewals as a percentage of total units

Step 5: Build a call list of 20-30 franchisees from the contact list (mix of current and former)

Step 6: During your calls, ask franchisees if the Item 20 numbers align with their on-the-ground experience

Step 7: Compare the franchise’s growth metrics against industry benchmarks and competitors

Item 20 isn’t glamorous. It doesn’t have the financial allure of Item 19 or the sticker shock of Item 7. But it’s the most honest section of the FDD because it’s based on verifiable, auditable facts — and it gives you the tools (the contact list) to verify everything else.

Ready to put Item 20 data to work? Browse our franchise library to see unit counts and growth data for 1,500+ franchise systems, or use the comparison tool to benchmark multiple brands side by side.