Beyond the Binder: Item 20 — Outlets and Franchisee Information
Item 20 is the franchise system’s truth serum. It lists how many units opened, closed, transferred, or were terminated over the past three years.
While the sales team is busy talking about “rapid growth” and “expanding territories,” Item 20 quietly keeps score.
Think of it as the brand’s report card; one that can’t be photoshopped.
The Big Picture: Openings and Closures
Franchisors love to talk about openings. Item 20 shows both sides of the equation.
Here’s what to focus on:
Total Units Open: Growth sounds great, but ask how it happened. Was it organic expansion or a fire-sale of discounted franchises?
Terminations: When franchisees are terminated, that usually signals either poor support or a franchisor quick to pull the plug.
Ceased Operations: This line is where the bodies are buried. Units that “ceased operations” often failed or were abandoned but never formally terminated.
Transfers: High transfer rates can indicate franchisees struggling to exit or sell under pressure.
A strong brand shows consistent openings and minimal closures. A shaky one looks like a revolving door.
Follow the Math, Not the Marketing
When you see numbers like “+25 new units in 2024,” read the rest of the column. If 18 closed the same year, that’s a net gain of 7. That’s not growth, that’s churn.
Always calculate net change yourself. The FDD won’t do it for you.
Example:
Year 1 – 50 units open
Year 2 – 60 open / 15 closed = 45 operating
That’s a 10% decline in actual locations even though “60 franchises were sold.”
Transfers: When Exit Becomes Escape
A transfer can mean a franchisee successfully selling their business or desperately getting out before it collapses.
Ask:
Were these voluntary sales or franchisor reacquisitions?
Are existing franchisees selling to new ones, or is the franchisor buying them back to resell later?
Do transfers correspond with changes in franchisor ownership or management?
A brand with high transfer activity and frequent “re-openings under new ownership” is not growing healthily, it’s spinning.
Terminations and Ceased Operations: Where the Truth Lives
This section tells you what franchisors wish you wouldn’t read.
Terminated: Usually means the franchisor ended the agreement for non-compliance or default.
Ceased Operations: Franchisee closed voluntarily or walked away. That’s still a failure.
Non-Renewed: Often a code for “we didn’t want them back.”
If a franchisor claims a 95% success rate but the Item 20 table shows 30% of units gone within three years, that’s your real answer.
Multi-Unit Operators and Phantom Growth
Some brands count every location sold to one multi-unit owner as “growth.”
So one person buying five territories can make the chart look impressive even if only two of those locations ever open.
That’s how you get “100 units sold” with only 30 operating. It’s not fraud, it’s franchise math.
When you see massive sold-vs-open gaps, check Item 5 and Item 7 for initial fees. Some brands make their money on selling licenses, not supporting operators.
The Illusion of Growth: Acquisitions, Rebrands, and Roll-Ups
When Item 20 shows a sudden spike in “new outlets,” it’s not always because of franchise sales. Sometimes, it’s corporate sleight of hand.
Franchisors can manipulate the appearance of expansion by:
Acquisitions: Buying another brand and relabeling those outlets under their own name. On paper, it looks like explosive growth. In reality, no new franchisees joined.
Rebrands: Changing the concept name resets the clock and hides prior closures. The same stores, same operators, new logo.
Roll-Ups: Absorbing affiliate-owned locations into the franchise count to make the system look bigger before a sale or investment round.
If Item 20 shows huge jumps in outlet numbers that don’t align with public announcements, dig into Item 1 for ownership disclosures and Item 3 for litigation.
Big acquisitions often come with big messes and a trail of unhappy former operators.
Where to Dig Deeper
Item 20 comes with three key tables and an exhibit:
Outlet Summary Table: Shows openings and closures for each year.
Transfers Table: Lists franchise changes in ownership.
Company-Owned Outlets: Shows how many locations the franchisor still controls itself.
Exhibit: A list of current and former franchisees with contact info. That’s your gold mine for due diligence.
Start calling. Ask former owners why they left and what really happened. The stories behind those numbers will tell you more than any sales deck.
The Franchise Reality Check™
Item 20 is the health chart of a franchise system. Every closure is a diagnosis. Every transfer is a symptom.
Before you sign a franchise agreement:
Track unit counts year over year. Is the system stable or bleeding outlets?
Compare openings to terminations. Is growth sustainable or a sales mirage?
Talk to former franchisees. Why did they leave? Would they do it again?
Look for patterns. Do closures cluster in certain regions or after ownership changes?
Healthy franchisors don’t fear transparency. They can explain their numbers.
The ones who can’t? They count on you not to check.
Franchise Reality Check™ makes no representations or warranties regarding the accuracy or completeness of information provided in this post. Nothing contained herein should be construed as legal, financial, or investment advice. Always consult with qualified professionals before making decisions regarding franchise or business opportunities.
