20% Turnover? Why High Franchise Closures Should Stop You Cold

Most franchise buyers focus on the brand, the product, and the promise of a "proven system." But there’s one number that should immediately raise a red flag: franchisee turnover. If a franchisor is losing 15%, 20%, or even more of its franchisees in a few years, that’s not normal, it’s a sign of a broken system.

Item 20 of the Franchise Disclosure Document (FDD) holds the data franchisors hope you won’t analyze too closely. It lists openings, closures, transfers, and terminations over a three-year period. When studied carefully, it can reveal whether franchisees are thriving or fleeing.

What Item 20 Really Tells You

Item 20 provides five tables showing:

• Units opened and closed each year

• Transfers (sales from one franchisee to another)

• Non-renewals

• Terminations (franchisor-initiated closures)

• Ceased operations for other reasons (franchisee walkaways)

Each of these metrics tells a different story; but combined, they paint a clear picture of franchisee success or distress.

What Counts as High Turnover?

In general:

• 0–10% turnover over 3 years is low to moderate

• 11–19% is concerning

• 20% or more should be a major red flag

High turnover indicates that franchisees are not achieving profitability, not receiving adequate support, or discovering that the business model doesn’t work as promised.

Why Franchisees Exit

Turnover isn’t always failure, but in most cases, it signals something wrong beneath the surface. Common causes include:

• Unrealistic startup cost estimates

• Poor franchisor support after launch

• High cost of goods or mandatory vendors

• Misleading financial expectations

• Franchisee burnout or low revenue

Franchisees don’t walk away from profitable businesses. If they’re leaving, there’s usually a financial or operational crisis behind it.

Red Flags to Watch For in Item 20

1. More closures than openings in recent years

2. A pattern of non-renewals or terminations

3. High rate of transfers (franchisees trying to sell and get out)

4. High failure rate among newer franchisees

Also ask: Are the same franchisees opening multiple units? Or is the system relying entirely on new buyers replacing failed ones?

What to Ask the Franchisor

• What is your three-year franchisee turnover rate?

• Why have franchisees exited the system?

• What steps have you taken to reduce closures?

• Can I speak to a franchisee who recently closed or sold their location?

Be wary if the franchisor dodges or downplays these questions. Transparency is non-negotiable.

What to Ask Franchisees

• Do you know anyone who left the system? Why did they leave?

• How many owners in your region have closed or transferred in the past two years?

• If you had to do it all over again, would you?

Peer-to-peer insights will tell you far more than polished sales decks ever will.

Turnover Isn’t Just a Statistic, It’s a Warning

High turnover is a symptom of something deeper: unprofitability, unmet expectations, or a lack of support. When the same story plays out across dozens of franchisees, it’s not an outlier, it’s a trend.

Every franchise brand wants to grow. But growth that comes from constantly replacing failed owners is not sustainable. It's predatory.

Before you fall in love with a brand, examine its turnover rate. A system with strong retention, happy franchisees, and low closures is a system worth considering. Anything else should give you pause.

Because once you sign, it’s too late for a reality check.