What Does Item 20 Disclose?
From a franchisee perspective, Item 20 is the single most important item in the FDD. It contains the outlet count, by state, of your corporate-owned and franchised units, and a list of all current and former franchisees, with their contact information. As a startup franchise, this will be blank, but as you grow, you will record how many outlets you had at the beginning of the year and how many outlets you have at the end of the year. If there’s a change, you will specify what those changes are, i.e., how many opened, closed, were terminated, transferred, or ceased operations for another reason.
As a new franchisor with zero outlets, you should keep in mind what this section will look like as you grow. Understand that as a franchisor, you are a semi-public company and Item 20 is your scorecard of how far and wide you have scaled the business. This is also where franchisees get to learn about you in a forum outside of your control. This is a good time to reflect on what the industry calls “validation”. Validation is when prospective franchisees call your current and former franchisees to validate the information they are learning from you and what you have stated in the FDD. You will tell them this is a great business, you will support them, and you have a great team. Franchise prospects will ask your franchisees if they agree. Your success will turn on how they answer those questions.
Why is Item 20 Critical?
A major reason franchisors never make it past five units is their first few franchisees struggle, are not happy, and don’t feel the love. If your first franchisees struggle, they will be in next year’s Item 20, they will get calls from prospective franchisees, and you don’t do any more deals.
This section, as proscribed by the regulation, can be a bit confusing and tricky to keep straight. But those are the rules, and we have to abide by them. You can see the categories below that are required. The best practice is to keep excellent records of each franchisee, transaction, and event to make the Item 20 process simple each year. Importantly, an outlet “counts” in Tables 1-4 of Item 20 if it has opened, or if it has stopped operations for any reason. We are not counting franchise agreements, except for Table 5, where we include a count of franchise agreements that are signed but the franchisee has not yet opened the business by the end of the franchisor’s last fiscal year.
Item 20 is also where you will need to disclose any independent franchisee association. If you have received formal notice within the timelines proscribed by law, even if you have an adversarial relationship with the association, you must disclose them in Item 20. If you know of any such organization or have gotten a formal notice, please let your franchise attorney know about it so we can properly disclose it.
Warning, Item 20 is an item that tends to derail the timeline on FDD renewals due to franchisors not staying current or keeping good records. So, keep good notes and records and use the systems we’ve developed for you as a client of the firm.
Item 20 Examples
Sample Item 20, Table No.1
ITEM 20: OUTLETS AND FRANCHISEE INFORMATION Systemwide Outlet Summary For years 2005 to 2007
| Outlet Type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
|---|---|---|---|---|
| Franchised | 2005 | 859 | 1062 | +203 |
| 2006 | 1062 | 1296 | +234 | |
| 2007 | 1296 | 2720 | +1,424 | |
| Company Owned | 2005 | 125 | 145 | +20 |
| 2006 | 145 | 76 | -69 | |
| 2007 | 76 | 141 | +65 | |
| Total Outlets | 2005 | 984 | 1207 | +223 |
| 2006 | 1207 | 1372 | +165 | |
| 2007 | 1372 | 2861 | +1,489 |
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20, Table No. 2
Transfers of Outlets from Franchisees to New Owners (Other than the Franchisor) for years 2005 to 2007. |
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20, Table No. 3
Status of Franchise Outlets For years 2005 to 2007
| State | Year | Outlets at Start of Year | Outlets Opened | Terminations | Non-Renewals | Reacquired by Franchisor | Ceased Operations- Other Reasons | Outlets at End of Year |
|---|---|---|---|---|---|---|---|---|
| AL | 2005 | 10 | 2 | 1 | 0 | 0 | 1 | 10 |
| 2006 | 11 | 5 | 0 | 1 | 0 | 0 | 15 | |
| 2007 | 15 | 4 | 1 | 0 | 1 | 2 | 15 | |
| TX
(Note 1) |
2005 | 20 | 5 | 0 | 0 | 0 | 0 | 25 |
| 2006 | 25 | 4 | 1 | 0 | 0 | 2 | 26 | |
| 2007 | 26 | 4 | 0 | 0 | 0 | 0 | 30 | |
| Totals | 2005 | 30 | 7 | 1 | 0 | 0 | 1 | 35 |
| 2006 | 36 | 9 | 1 | 1 | 0 | 2 | 41 | |
| 2007 | 41 | 8 | 1 | 0 | 1 | 2 | 45 | |
Notes
(1) One outlet had several changes of ownership during the fiscal year. On February 1, 2006, Belmont reacquired a Texas outlet from its owner-franchisee and then resold it on March 1, 2006, to a new franchisee-owner. On December 1, 2006, however, the new franchisee-owner ceased operations.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20, Table No. 4
Status of Company-Owned Outlets For years 2005 to 2007
| State | Year | Outlets at Start of Year | Outlets Opened | Outlets Reacquired From Franchisees | Outlets Closed | Outlets Sold to Franchisees | Outlets at End of Year |
|---|---|---|---|---|---|---|---|
| NY | 2005 | 1 | 0 | 1 | 0 | 0 | 2 |
| 2006 | 2 | 2 | 0 | 1 | 0 | 3 | |
| 2007 | 3 | 0 | 0 | 3 | 0 | 0 | |
| OR | 2005 | 4 | 0 | 1 | 0 | 0 | 5 |
| 2006 | 5 | 0 | 0 | 2 | 0 | 3 | |
| 2007 | 3 | 0 | 0 | 0 | 1 | 2 | |
| Totals | 2005 | 5 | 0 | 2 | 0 | 0 | 7 |
| 2006 | 7 | 2 | 0 | 3 | 0 | 6 | |
| 2007 | 6 | 0 | 0 | 3 | 1 | 2 |
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20, Table No. 5
Projected Openings As of December 31, 2007
| State | Franchise Agreements Signed But Outlet Not Opened | Projected New Franchised Outlet in the Next Fiscal Year | Projected New Company-Owned Outlets in the Next Fiscal Year |
|---|---|---|---|
| CO | 2 | 3 | 1 |
| NM | 0 | 4 | 2 |
| Total | 2 | 7 | 3 |
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20: Outlets and Franchisee Information (Former Franchisee Contact Information)
Former Franchisee Contact Information
During the last fiscal year, several Belmont Mufflers franchisees have left the system. Two Belmont Muffler franchisees voluntarily ceased to conduct business:
John Smith
Denver, Colorado
Current business telephone number:
(111) 000-0000
Paul Berg
Austin, Texas
Last known home telephone number:
(222) 111-1111 .
One Belmont Mufflers franchisee did not renew:
Alice Harris
Atlanta, Georgia
aliceharris@xxxyyy.com
One additional Belmont Mufflers franchisee has not communicated with Belmont Mufflers during the period 10 weeks.
Mary Peterson
Madison, Wisconsin
(123) 222-2222
If you buy this franchise, your contact information may be disclosed to other buyers when you leave the franchise system.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20: Outlets and Franchisee Information (Previous Owner Information)
Previous Owner Information
We are offering for sale the Belmont Mufflers unit at:
171 Delfi Street
Arlington, VA 12345
Within the last five years, this specific unit was owned by two franchisees.
January 1, 2002 – March 15, 2003:
Thomas A. Fields
23 Newhampton Circle
Arlington, VA 12345
Current business telephone number: (124) 444-4444
Mr. Fields voluntarily terminated the franchise in order to pursue other interests.
March 16, 2003 – June 5, 2004:
On March 16, 2001, Belmont Mufflers reacquired the unit and operated it as a company-owned outlet until June 5, 2004.
June 6, 2004 – October 20, 2007:
Susan Wadsworth
86 Bratock Road
Arlington, VA 12345
Last known home telephone number: (124) 555-5555.
Ms. Wadsworth was terminated on October 20, 2007, for failure to pay royalties.
October 21, 2007 – to date:
On October 2, 2006, Belmont Mufflers reacquired the unit and continues to operate it as a company-owned unit.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20: Outlets and Franchisee Information (Confidentiality Agreement Disclosure)
Confidentiality Agreements
In some instances, current and former franchisees sign provisions restricting their ability to speak openly about their experience with Belmont. 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.
During the last year, Belmont entered into two agreements with franchisees that contained confidentiality restrictions (2 out of 100 franchisees, or 2% of our franchisees). In both instances, the confidentiality restrictions were signed as part of mutually agreed upon settlements of litigation.
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
Sample Item 20: Outlets and Franchisee Information (Franchisee Association Disclosure)
Franchisee Associations
Belmont Mufflers, Inc., created and supports the Belmont Mufflers Franchisee Association:
1234 Second Street Jackson, MN 55000.
(612) xxx-xxxx
Smith@BMFA.org, www.bmfa.org
The following independent franchisee organization has asked to be included in this disclosure document:
Muffler Franchisees of North America, Inc.
2222 Third Street
Albany, NY 11111 (222) 777-8888
Jones@MFONA.org
www.Muffler.org
This is a sample section from a fictional FDD for Belmont Muffler Shops that was prepared by the Federal Trade Commission as a compliance guide for franchisors preparing their FDD. These are used to provide an idea of what these items may look like in an FDD, but keep in mind, your FDD will most likely vary significantly from these examples.
