The Most Important Items in an FDD: Item 20 - Outlet, Transfer and Franchise Owner Information

Each item within a franchise brand’s franchise disclosure document (or FDD) contains extremely valuable information for a prospective franchisee. From the cost to franchise to the highest ROI possibilities and more, there is plenty of information to help prospective franchisees decide whether they want to join a particular franchise system. In particular, Item 20 contains some especially valuable nuggets for candidates to pay attention to, including the total number of outlets in the franchise system and relevant information on closures and transfers in recent history, as well. 

“[Item 20 consists of] five charts or tables that lay out that information in different ways. There’s a lot you can tell from these charts about the system and what’s happening in the system because it dates back three years,” Fox Rothschild partner Elizabeth Sigety said. “You can learn about growth. You can learn about attrition. You can tell about how many stores or units are owned by the franchisor versus owned by franchisees—I think it can be extremely telling if read properly.” 

Item 20 also includes a list of a brand’s existing franchisees and their contact information, something Sigety deemed “extremely valuable” to franchise prospects in their discovery process, as the list is their best means of validation.

“Any time I represent a prospective franchisee I tell them to cold call—just pick randomly and cold call—a bunch of those franchisees,” Sigety said. She also advised prospective franchisees to call existing franchisees who operate in similar markets to the one they are considering bringing the brand to. If a prospective franchisee, for example, wants to open a franchise in a big city, they should call existing franchisees who operate in big cities to gain an even clearer picture of the specific hurdles or challenges they may face. 

Sigety also advised prospective franchisees to contact more than those franchisees suggested by a brand’s corporate leadership team.

“I do warn people that in any system, there are going to be some unhappy franchisees, but don’t just call the ones that the franchisor tells you to call” she said. “Some people just aren’t good at running a business and often will want to blame that on reasons other than their own issues. However, if [prospects] begin to hear a lot of similar things from multiple people, then buyer beware.” 

Prospective franchisees should also pay close attention to the transfer numbers presented in a brand’s Item 20, as a high number of transfers can signal issues within a franchise system, Sigety advised. This further underlines the importance of validation calls with existing franchisees—others within the system are likely to give prospects the clearest, most unbiased answer as to the reasons for a higher number of transfers.

“[Franchisees] could be transferring because their unit is so much more profitable and successful [than when they purchased] and they’re making a boatload on the sale, or they could be transferring because they’re trying to get out of a disaster,” Sigety explained. 

Other critical information found within Item 20 is the status of franchise outlets, including the number of terminations and how many have ceased operations over the last year and three years. Sigety noted that while franchisees cease operations for a variety of reasons and that franchisors can have valid reasons to terminate franchisees, if the numbers for both are “unusually large,” that can be an issue to weigh in their decision. “If a franchisor is terminating its franchisees and there are a lot of terminations, then you have to find out why that’s happening,” she said. 

Prospective franchisees should also look at the table that provides numbers related to projected franchise openings, Sigety said. “Did any of those fail to open? Did people sign the franchise agreement and pay the fee and then never get there?” she asked. “I don’t see that as much, but that would be troublesome because they’ve already invested a lot of money. Another thing to look at here is how many corporate stores versus franchisee-owned stores a system has. Has there been a huge increase in corporate-owned stores and a big decrease in franchise-owned stores? Is this turning into a system where they don’t value the franchisee side of it as much?” 

Of course, prospective franchisees should take note of just how many stores are open in the first place, too. Franchise candidates have a choice here: Do they want to join a young-but-growing system and help lead the way for the brand, or are they looking to join an established, healthy business that has all of the resources to protect their investment already established? Ultimately, Item 20 gives a prospective franchisee the big picture of the system and where it’s coming from and where it’s going, Sigety said 

“People really should look closely at it. It is an important item for due diligence.”