What is Item 20 in the Franchise Disclosure Document?
Within Item 20, the franchisor must disclose, in five separate tables, a summary of the franchised and corporate outlets over the prior three years and a projection as to future openings in the next year.
When it comes to selling a franchise, transparency is critical for prospective franchisees to make informed decisions about their investments.
The disclosures in Item 20 of the Franchise Disclosure Document (FDD) pertaining to outlets and franchisees are intended to help franchisee candidates gain an understanding of the franchise system’s sales and franchisee track record. By providing prospective franchisees with data and information about existing and future outlets, candidates can feel confident that the franchise system they’re investing in is sustainable.
Below, we’ll explore the information franchisors must disclose about franchised and corporate-owned outlets to help prospective franchisees get a clear picture of the entire franchise system before making a purchase.
What Information Must Be Disclosed in Item 20?
Under the federal Franchise Rule, within Item 20 franchisors must disclose specific data about the number of company-owned and franchised outlets within the franchise system for the three most recent fiscal years, as well as other specific information related to the ownership, status and projected openings of systemwide outlets. Additionally, Item 20 must disclose confidentiality agreements and trademark-specific franchisee organizations.
Item 20 Disclosures and Format
While some of the disclosures in Item 20 may be presented in plain text, several must adhere to a prescribed tabular format outlined in 16 CFR § 436.5(t). This includes five specific tables addressing precise data and information about the franchise system’s outlets.
Table 1: Systemwide Outlet Summary
The first table in Item 20 offers prospective franchisees a summary of systemwide outlets, including information about net changes in the total number of franchised and company-owned outlets, over the last three fiscal years. For this section, the Federal Trade Commission (FTC)’s definition of an outlet includes “outlets of a type substantially similar to that offered to the prospective franchisee.”
Table 1 must contain five specific columns:
Column 1: “Outlet Type.” This column must include three outlet categories: “franchised,” “company-owned” and “total outlets.”
Column 2: “Year.” In this column, list the most recent three fiscal years.
Column 3: “Outlets at the Start of the Year.” State the total number of each type of outlet in operation at the start of each fiscal year.
Column 4: “Outlets at the end of the year.” State the total number of each type of outlet operating at the end of each fiscal year.
Column 5: “Net Change.” The fifth column must state the net change in the number of each type of outlet operating during each fiscal year and indicate whether the change was positive or negative.
Table 2: Transfers of Outlets from Franchisees to New Owners (Other Than the Franchisor)
The second table in Item 20 provides information about the systemwide transfer of franchised and company-owned outlets by state over the last three fiscal years. For this section, the FTC defines transfers as “the acquisition of a controlling interest in a franchised outlet, during its term, by a person other than the franchisor or an affiliate.” This definition includes the sale of controlling interest in a franchised business as well as the private sale of an outlet from an existing franchisee-owner to a new franchisee-owner.
Table 2 must contain three specific columns:
Column 1: “State.” This column must list all states where one or more franchised outlets have operated in the last three fiscal years.
Column 2: “Year.” This column must list the last three fiscal years.
Column 3: “Number of Transfers.” State the total number of completed transfers in each state during each of the three most recent fiscal years.
Table 3: Status of Franchised Outlets
The third table in Item 20 provides information about changes in the status of franchised outlets by state over the last three fiscal years.
Table 3 must include nine specific columns:
Column 1: “State.” This column must list all of the states where one or more franchised outlets have operated during the last three fiscal years.
Column 2: “Year.” In this column, list the last three fiscal years.
Column 3: “Outlets at the Start of the Year.” State the total number of franchised outlets in operation in each state at the start of each fiscal year.
Column 4: “Outlets Opened.” State the number of franchised outlets opened in each state during the three prior fiscal years, including new franchised outlets and existing company-owned outlets that were purchased by franchisees from the franchisor. Franchisors must also disclose the total number of existing company-owned outlets sold to franchisees in Table 4 of Item 20.
Column 5: “Terminations.” State the total number of terminated franchised outlets in each state during each of the last three fiscal years. For this section, termination is defined by the FTC as “the franchisor's termination of a franchise agreement prior to the end of its term and without providing any consideration to the franchisee (whether by payment or forgiveness or assumption of debt).”
Column 6: “Non-Renewals.” State the total number of non-renewals in each state during each of the three prior fiscal years. For disclosure purposes in this section, the FTC considers a non-renewal to occur “when the franchise agreement for a franchised outlet is not renewed at the end of its term.”
Column 7: “Reacquired by Franchisor.” State the total number of franchised outlets reacquired by the franchisor during each of the last three fiscal years in each state. For disclosure purposes in this section, the FTC defines a requisition as “the franchisor's acquisition for consideration (whether by payment or forgiveness or assumption of debt) of a franchised outlet during its term.” Outlets reacquired by the franchisor must also be disclosed in Table 4 of Item 20.
Column 8: “Ceased Operations - Other Reasons.” Disclose the total number of franchised outlets that stopped operating as one of the franchisor’s outlets in each state during each of the three most recent fiscal years for reasons other than termination, non-renewal or franchisor reacquisition, including franchisees that currently hold “inactive” status.
Column 9: “Outlets at the End of the Year.” State the total number of franchised outlets in each state at the end of each of the three prior fiscal years.
Table 4: Status of Company-Owned Outlets
The fourth table in Item 20 exhibits changes in the status of company-owned outlets by state during the last three fiscal years.
Table 4 must include eight specific columns:
Column 1: “State.” This column must list all of the states where one or more company-owned outlets have operated during the last three fiscal years.
Column 2: “Year.” This column must list the last three fiscal years.
Column 3: “Outlets at Start of Year.” Similar to Table 3, this column must state the total number of each type of company-owned outlet in operation at the start of each fiscal year in each state.
Column 4: “Outlets Opened.” State the total number of company-owned outlets opened in each state during the three prior fiscal years.
Column 5: “Outlets Reacquired from Franchisee.” In this column, state the total number of franchised outlets that were reacquired by the franchisor in each state during each of the last three fiscal years.
Column 6: “Outlets Closed.” State the total number of company-owned outlets that closed in each state during each of the three prior fiscal years. In addition to actual closures, this disclosure includes situations where an outlet ceased operation under the franchisor’s trademark.
Column 7: “Outlets Sold to Franchisee.” State the total number of company-owned outlets that were sold to franchisees in each state during each fiscal year.
Column 8: “Outlets at End of the Year.” In this column, state the total number of company-owned outlets operating in each state at the end of each of the three most recent fiscal years.
Table 5: Projected Openings As Of [Last Day of Last Fiscal Year]
The fifth, and final, table in Item 20 provides information about projected new outlet openings in each state in the next fiscal year, as well as the total number of franchise agreements that have been signed by new franchisees but whose outlets remain unopened.
Table 5 of Item 20 must include four specific columns:
Column 1: “State.” This column must list each state where one or more franchised or company-owned outlets are currently, or are projected to be, located.
Column 2: “Franchise Agreements Signed but Outlet Not Opened.” State the total number of franchise agreements, by state, that were signed by new franchisees but have not yet opened as of the end of the last fiscal year.
Column 3: “Projected New Franchised Outlet in the Next Fiscal Year.” For each state, disclose the total number of projected new franchised outlets expected to open in the next fiscal year.
Column 4: “Projected New Company-Owned Outlet in the Next Fiscal Year.” For each state, disclose the total number of projected new company-owned outlets expected to open in the next fiscal year.
Franchisee Contact Information
Franchisors must disclose specific contact information for current and former franchisees in Item 20. This information assists in the validation process and can be helpful for prospective franchisees wishing to learn about the experiences of business owners in the franchise system before making a purchase.
Current Franchisees
Within Item 20, franchisors must disclose the names of all current franchisees and the addresses and phone numbers of their outlets. The federal Franchise Rule permits franchisors to disclose contact information for all franchised outlets in the state; however, 16 CFR § 436.5(t)(4) requires franchisors with fewer than 100 franchised outlets in the state to disclose contact information for franchised outlets “from contiguous states and then the next closest states until at least 100 franchised outlets are listed.”
Former Franchisees
In addition to providing contact information for current franchisees, franchisors must disclose the name, city, state and current business phone number (or last known phone number, if the current business number is unknown) for each franchisee that has had an outlet terminated, not renewed, canceled, or voluntarily or involuntarily ceased operations under the franchise agreement in the prior fiscal year. The same information must also be provided for any franchisee with whom the franchisor has not communicated within 10 weeks prior to the issuance date of the FDD. At the request of a former franchisee, franchisors are permitted to disclose alternative contact information (home address, telephone number, etc.) rather than business information.
Mandatory Privacy Notice
Per 16 CFR § 436.5(t)(5), franchisors must include the following statement verbatim when disclosing franchisee contact information in Item 20: “If you buy this franchise, your contact information may be disclosed to other buyers when you leave the franchise system.”
Company-Acquired Franchises
In situations where a franchisor is selling an outlet that was acquired from a former franchisee and is currently under the franchisor’s control, the following information must be disclosed for the most recent five fiscal years:
The name, city, state, current business phone number or last known home phone number for each former owner of the outlet being offered.
The time period(s) during which each former owner controlled the outlet.
The reason for each change in ownership of the outlet.
The time period(s) during which the franchisor controlled the outlet.
These disclosures should be made as an addendum to the FDD. If the FDD has already been issued to the franchisee candidate, these disclosures must be provided as a supplement.
Confidentiality Clauses
Confidentiality agreements can sometimes be viewed by franchisee candidates as detrimental to the validation process. Because of that, franchisors must disclose whether any franchisees signed confidentiality agreements during the three prior fiscal years. If so, the franchisor must include the following statement word-for-word in Item 20: “In some instances, current and former franchisees sign provisions restricting their ability to speak openly about their experience with [Name of Franchise System]. You may wish to speak with current and former franchisees, but be aware that not all such franchisees will be able to communicate with you.”
Along with this information, franchisors are permitted to provide the number or percentage of franchisees that signed franchise agreements containing confidentiality clauses in the last three years. Under the federal Franchise Rule, franchisors may also disclose the circumstances surrounding such clauses in Item 20.
Franchisee Organizations
Within Item 20, franchisors must disclose the name, phone number, address, email address and website (to the extent known) of any trademark-specific franchisee organizations associated with the franchise offering that meet the following criteria:
The organization was created, endorsed or sponsored by the franchisor. If applicable, the franchisor must state its relationship to the organization.
The organization was organized or incorporated under state law and requested to be included in the franchisor’s FDD for the next fiscal year. These requests are renewed annually and must be submitted within 60 days following the end of a fiscal year; however, franchisors aren’t obligated to verify an organization’s continued existence at the end of each year. Because of that, the Franchise Rule permits franchisors to include the following statement in Item 20: “The following independent franchisee organizations have asked to be included in this disclosure document.”
Other Considerations
When preparing Item 20, franchisors should take care not to disclose events affecting the same outlets more than necessary. In situations where multiple events occurred during a fiscal year that affected the status of any specific outlet, only the most recent event must be disclosed in Item 20. Footnotes may be used to clarify multiple events for added transparency, but aren’t required.
In addition to following a specifically prescribed format, Item 20 disclosures require precision and accuracy. By working with an experienced franchise attorney to prepare the FDD, franchisors can feel confident that their Item 20 disclosures are compliant with federal franchise regulations.
To learn more about outlet and franchisee reporting and how we can help develop, review or improve your Item 20 disclosures, call us at (800) 976-4904 or fill out our contact form.