Who stayed, and who quit?
Item 20 is the closest thing the FDD has to a built in honesty test. It counts how many outlets opened, closed, transferred, and were taken back over three years, and it hands you the contact list to verify every other claim yourself, starting with the earnings in Item 19.
This chapter runs from the few things every buyer must know, at the surface, down to the detail only some will need, in the trench. It darkens as you go deeper. Scroll to begin.
The few things every buyer needs before reading a single row of the outlet tables.
- Closures and terminations are low versus openings
- Transfers look like retirements, not escapes
- Net unit count is growing on retention
- A full former owner contact list is provided
- Heavy ceased operations or terminations
- High transfers that may be distress sales
- Growth that only comes from replacing owners
- Projections far above what it actually opens
What Item 20 actually is
Item 20 is a set of tables showing, by year and usually by state, how the outlet count moved over the last three years. The columns name every way an outlet can come or go: opened, terminated by the franchisor, not renewed, reacquired by the franchisor, transferred to a new owner, and ceased operations for other reasons. It also gives the count of company owned versus franchised units, and, most valuable of all, the contact information for current and former franchisees.
Every other section is the franchisor describing itself in its own words. Item 20 is a count of what actually happened to the people who went before you, and then it hands you their phone numbers. If a third of owners left in three years, believe the table, not the brochure. No other page lets you check the franchisor's entire story against the people who lived it, which is exactly why it is worth more than any glossy claim elsewhere in the document.
This is the pairing that catches the most buyers. A strong Item 19 earnings average can sit on top of heavy closures here, because the average is usually taken from the units that survived the year. A great number and a high exit rate point in opposite directions, and when they do, the exit rate is the more honest of the two. Always read these two items together.
Everything below is what they hope you skim.
The surface is the headline count. The depth is who actually left, and why. From here on it is more detail, and a little less essential, the deeper you go.
Paste a clip of your Item 20. We point out what matters.
Paste a clip or section of Item 20, even a few rows of the outlet table is enough, and we check that snippet: the biggest issue, the churn hiding behind net growth, what is missing, and the exact questions for your attorney and for current and former owners. Evidence only. No score, no verdict, no guessing.
Reading the text…
Issues found
What the text actually says
What is missing
Questions for your attorney
Questions for current and former franchisees
Read literally from the text you pasted. This is not legal, financial, or accounting advice, and it is not a verdict on the franchise. These are starting points for your own diligence.
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Read the free guideFive questions, answered straight from the rows, tell a stable system from a churning one.
How many ceased operations?
Good Few closures relative to openings.
Watch Heavy ceased operations, the clearest failure signal.
How many transferred?
Good Low, and resales at healthy prices.
Watch High transfers can be owners quietly exiting.
Terminations or non renewals?
Good Rare, with clear reasons.
Watch The franchisor pushing owners out, or owners walking.
Real growth, or replacement?
Good Net growth with low exits.
Watch Openings high, but exits high too.
Did you get the former owner list?
Good A full list of current and former owners.
Watch Missing or partial, the contacts are the prize.
Each column is a different way an owner can leave, and they do not mean the same thing.
What each kind of exit means
Ceased operations is the bluntest failure signal: a unit that closed and did not reopen. Terminations are the franchisor ending the agreement, usually for nonpayment or for failing standards, and a cluster of them says the relationship broke down for a number of owners. Non renewals are owners who reached the end of the term and chose not to continue, which is quietly telling if those owners were profitable, because profitable owners usually renew. Transfers are sales to a new owner, and they can be healthy, an owner retiring and cashing out, or a distress sale by someone trying to get out, and the price tells you which. Reacquisitions are the franchisor buying units back, and the question to ask is whether it is rescuing failing locations or taking back the best ones.
A handful of closures in a 2,000 unit system is ordinary background. The same count in a 40 unit system is a serious story. Always read the negative events as a share of the units that existed at the start of the year, not as a raw number, because the raw number means nothing without the base.
“Outlets at start of year: 420. Opened: 28. Ceased operations: 6. Transfers: 9. Outlets at end of year: 433.”
Strong net growth on low exits: few closures and transfers relative to the base.
“Outlets at start of year: 100. Opened: 25. Ceased operations: 18. Transfers: 20. Outlets at end of year: 107.”
“Net +7” on the surface, but roughly a third of the base turned over. Count the exits, not the net.
Illustrative wording, not a real franchise.
A system can add units every year and still be chewing through owners. This is how you see it.
Net growth can mask heavy turnover
Look at the start of year and end of year counts together with the exits, and do the arithmetic yourself. Suppose a system started the year at 100 units, opened 25 new ones, lost 18 to ceased operations, and saw 20 transfers, ending at 107. The headline is "the system grew by seven units." The reality is that roughly 38 units, more than a third of the base, turned over or changed hands, and the new openings simply papered over the losses. A system that grows by constantly replacing owners is a very different investment than one that keeps them, and the only way to see the difference is to count the exits, not just the net.
This is the direct link to Item 19. If the earnings figures are drawn only from units that were open at year end, they exclude exactly the units that closed and were reacquired here, which means the average looks strong precisely because the weak units left the sample. Ask the franchisor, in writing, whether the outlets included in the Item 19 figures exclude the closures and reacquisitions shown in Item 20. The answer reframes the whole earnings claim.
Three quieter signals separate a confident disclosure from an optimistic one.
- Projected versus actual openings: Item 20 projects next year's new outlets. If the system projects 75 openings after actually opening 12 last year, ask what makes this year six times better. A projection far above recent reality is either optimism or a sales target dressed up as a forecast.
- Signed but unopened: a backlog of signed agreements that have not opened can mean owners are stuck on financing, real estate, or permitting, or are having second thoughts. A growing backlog with few actual openings is a sign that getting open is harder than the pitch suggests.
- State and regional concentration: the state by state tables show whether closures cluster in particular markets. A system that is healthy nationally can be failing in the region you would operate in, and if your target market is one of the weak ones, that matters far more to you than the national total.
If you have read this far, here is the single most valuable thing to do with Item 20.
Call the people who left
The franchisor must give you contact information for current and, in most cases, former franchisees. Do not just call the references the franchisor hands you, because those are selected to sell you. Call a real sample of your own choosing, and make a point of reaching owners who closed, sold, or were terminated. Ask what they actually netted in year one and year two, whether their costs matched Items 5 to 7, whether the earnings matched Item 19, and what they would do differently. People who have already exited have no reason to sell you and every reason to tell you the truth.
Item 20 is the reality check for the whole document. It confirms or undercuts the earnings claim in Item 19, it exposes a franchisor that earns by selling new units rather than keeping them, which you can also see in Item 21, and it surfaces the support complaints that never appear in Item 11. Read the table, then call the list.
What to ask
- "Why did the owners who left, leave, and can I speak with some of them directly?"
- "Can I see the closure and transfer numbers for the specific region I would operate in?"
- "Do the Item 19 figures exclude the units that closed or were reacquired in Item 20?"
- "For the transfers, were they profitable resales, and what prices did the sellers actually get?"
This is one chapter. The full FDD diligence guide walks the rest: the earnings claim, real costs, litigation, support, territory, and control. Read who stayed here, then keep going.
Common questions about Item 20
What does Item 20 of an FDD show?
Item 20 shows, by year and state, how the outlet count moved: how many opened, closed, were terminated, were not renewed, were reacquired, or were transferred. It also provides the contact list for current and former franchisees.
How do you spot churn hidden by growth in Item 20?
Compare the start and end counts to the exits. A system can grow in net units while many owners leave, because new openings replace them. Add up closures, terminations, non renewals, and transfers, and read that against the openings, not just the net change.
Can I contact former franchisees from Item 20?
Yes. Item 20 provides contact information for current and, in most cases, former franchisees. Calling owners who closed or sold, not just the references the franchisor hands you, is the most valuable diligence step available to a buyer.
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