How to Put the Information in Item 20 to Good Use in Your Discovery Process

For a prospective franchisee, there are many stages and steps involved in deciding whether a franchise brand is the right fit for them. Obtaining a brand’s franchise disclosure document, or FDD, though, is a major game-changer. An FDD contains a great deal of information about a franchise, but nothing is quite as advantageous for a prospective franchisee as the information listed in Item 20. 

For one, Item 20 lists the franchise system’s current franchisees. Item 20 also contains data tables that show the number of franchise and company-owned locations, the number of store transfers, the statuses of franchised and company-owned outlets and the projected number of new franchise outlets. 

It’s a lot of information, all of which prospective franchisees can put to good use as they navigate a franchise brand’s discovery process. Representatives from the gym brand Retro Fitness and full-service doggy daycare brand Central Bark each gave their perspective on how prospective franchisees can make the most of the information provided in Item 20. 

Prospective franchisees should review all of the tables supplied “with a fine eye” on the first table, which shows the number of system-wide outlets over a three-year period, Retro Fitness Vice President of Franchise Development Patrick Pantano said in an email. 

“Preferably you’d like to see year-over-year growth,” Pantano said. “In some cases, however, a decrease may reveal positive opportunities for the prospect in such cases where the franchisor is strengthening its position across the system and cleaning non-compliant or non-investing owners.” 

Chris Simnick, the president and founder of the consulting company Synergy Franchise Group, which helps Central Bark with its franchise development efforts, actually believes that Item 20 is somewhat outdated due to the advent of websites and technology. 

“What Item 20 is very good for and useful for is it shows stability, or lack thereof, of a franchise model over the course of a three-year period,” Simnick said. 

In terms of franchisee outreach, prospective franchisees should consider calling both current and former brand franchisees, especially those who have or had outlets in the same state in which they want to franchise, Pantano said. 

“Look at the current and former franchisee list and call the franchisees from both lists to get a greater insight into the workings of the franchisor,” Pantano said. 

Of course, feedback should be taken with a grain of salt. 

“I would suggest that you use your best judgment when calling former franchisees,” Pantano said. “These may be disgruntled from having lost their franchise rights for non-compliance and non-payment or other local lease and licensing reasons.” 

So how many franchisees should a prospective franchisee reach out to when determining whether the brand is the right fit for them? 

“I would call all of the former franchisees, and then I would pick 10 to 20% from the entire system to call and get some insider knowledge about the market and franchisor,” Pantano said. “Obviously, if there are thousands of franchisees in the system, I would choose a smaller random selection to contact.” 

As for Simnick, he wants prospective franchisees to look at the validation process from “intra-preneurial aspect,” he said. In other words, a prospective franchisee should think about what aspect of the business they would not be comfortable with and look into whether the franchisor has the tools and systems in place to support them. 

Ultimately, when reaching out to existing franchisees, prospective franchisees should ask them whether they would do it again, what they would do differently and if they would franchise again with the same company, Simnick said. 

Simnick noted that people who went into franchising 20 years ago had questions that solely revolved around how much money they could make. This attitude has shifted, and now people want to know if they can make money and also have time to enjoy life outside of work, Simnick said. 

“There’s a quality and a quantity aspect,” Simnick said. 

Bottom line: Prospective franchisees can get quite a bit out of a brand’s Item 20 information. By carefully examining franchise outlet data and asking thoughtful questions of existing and former franchisees, prospective franchisees can determine whether they want to sign on the dotted line.