Item 20 Decoded: How to Use Unit Turnover Data to Spot System Problems

Item 20 of the Franchise Disclosure Document is the section that franchise attorneys and experienced buyers read first, and that most first-time buyers skim or skip entirely. It contains no marketing language, no testimonials, and no aspirational projections. It contains raw data about the one thing that matters more than almost anything else in franchise evaluation: what is actually happening to franchisees in this system over time.

WHAT ITEM 20 ACTUALLY CONTAINS: The FTC's franchise disclosure rule requires Item 20 to include eight distinct sub-tables covering five years of system activity. The first table lists current franchisees by state with their contact information. The second presents a system-wide summary showing, for each of the past five years, the number of franchised outlets at the start of the year, the number opened, the number closed, the number terminated, the number not renewed, the number reacquired by the franchisor, and the number ceased operations. Additional tables cover transfers, projected openings, and franchisee contact information for those who left the system in the past year.

Each of these tables contains information that, when properly analyzed, tells a detailed story about the health and trajectory of the franchise system. The goal is not to find perfect numbers — no system is perfect — but to identify patterns that reveal whether franchisees are succeeding, struggling, or leaving at rates that suggest fundamental problems.

THE TURNOVER RATE CALCULATION: The turnover rate is the single most important metric you can calculate from Item 20, and it is never presented directly by the franchisor — you must calculate it yourself. The formula is straightforward: add all exits (closures plus transfers plus terminations plus non-renewals) for a given year, then divide by the total number of units at the start of that period. Multiply by 100 to express as a percentage.

A turnover rate below 5% is excellent. It indicates that franchisees are staying in the system, performing well enough to continue operating, and choosing not to exit when they have the opportunity. Rates between 5% and 8% are normal for a healthy system — some franchisee exits are expected in any year. Rates above 10% are a warning sign that requires investigation. Rates above 15% constitute a serious red flag indicating widespread franchisee dissatisfaction, financial failure, or both. Calculate this metric for each of the five years covered in Item 20 and look at the trend — a rate that is stable at 8% is different from one that was 5% three years ago and has been climbing.

NET UNIT GROWTH: THE MOST HONEST SYSTEM HEALTH METRIC: Net unit growth is calculated by subtracting the number of units at the beginning of a year from the number at the end. A positive number means the system is expanding — more franchisees are entering than leaving. A negative number means the system is contracting. Any franchise system showing sustained negative net unit growth over three or more consecutive years has a fundamental problem: franchisees are leaving faster than new franchisees are entering, which means the opportunity is not compelling enough to attract buyers at the pace needed to sustain growth.

Sustained negative growth also affects you as a potential franchisee in a practical way: it reduces the pool of comparable sales data for resale valuation, signals potential brand equity erosion, and indicates that the franchisor is not successfully attracting new capital into the system. None of these are positive signals for the exit value of your investment.

FINDING THE REAL CLOSURE RATE: Some franchisors present Item 20 data in ways that obscure the distinction between voluntary exits and failure-driven exits. A transfer listed in Item 20 could represent a successful franchisee who built a valuable business and sold it to a qualified buyer — or it could represent a struggling franchisee who sold at a loss to exit an unprofitable situation. The Item 20 tables do not automatically distinguish between these scenarios.

The category that most clearly obscures failures is "reacquired by franchisor." When a unit is reacquired by the franchisor, it is typically because the franchisee could not operate it profitably and the franchisor took it back rather than allowing it to close outright. This is not a voluntary transfer — it is functionally equivalent to a closure from the franchisee's perspective. During validation calls, ask franchisees directly: what percentage of transfers in the system are voluntary sales versus distressed exits? The FDD does not tell you this; the people in the system can.

READING THE 5-YEAR HISTORY TABLE: The most powerful use of Item 20 is reading trends across the full five-year history, not just the most recent year. A system with 1,200 units in 2020 that has declined to 900 units in 2024 is telling a materially different story than a system with 800 units in 2020 that has grown to 1,100 units over the same period. The trajectory matters as much as the current number. Look specifically for inflection points — years where the trend changed significantly — and investigate what happened in the business or the competitive environment during that period.

CROSS-REFERENCING WITH ITEM 3 LITIGATION: Item 20 turnover data is most informative when read alongside Item 3, the litigation disclosure. The combination of high turnover and active franchisee-initiated litigation against the franchisor is the most reliable indicator of systemic problems in a franchise system. High turnover alone could reflect normal lifecycle churn. Active franchisee litigation alone might reflect a small number of difficult operators. The combination of both — franchisees leaving at above-average rates while other franchisees are suing the franchisor — indicates widespread dissatisfaction with fundamental aspects of the franchise relationship. Conversely, low turnover combined with zero franchisee-initiated litigation is among the strongest indicators of system health available in the FDD.

CALLING EX-FRANCHISEES: Item 20 includes a mandatory list of franchisees who left the system in the past year, with their contact information. This list is one of the most valuable assets in the entire FDD for due diligence purposes, and it is consistently underutilized by buyers who focus only on current franchisees. Ex-franchisees are typically more candid than current franchisees because they have no ongoing relationship with the franchisor to protect. Call at least three. Ask why they left, whether they would make the same investment decision again, whether the financial performance matched what they were shown during the sales process, and whether they experienced any problems with the franchisor that influenced their decision to exit.

REAL EXAMPLES FROM THE MARKET: To illustrate how Item 20 analysis works in practice, consider two hypothetical systems. Franchise "Alpha Subs" shows five consecutive years of positive net unit growth, a stable turnover rate of 4.8% per year, zero franchisee-initiated litigation in Item 3, and a growing total unit count from 320 to 480 over the period. This pattern suggests franchisees are succeeding, new buyers are attracted to the opportunity, and the franchisor relationship is functioning well. Franchise "Beta Burgers" shows three consecutive years of negative net unit growth, a turnover rate that increased from 7% to 13% over four years, two active franchisee lawsuits in Item 3 alleging financial misrepresentation, and a total unit count that declined from 290 to 215 over the period. These numbers tell a story of systemic failure — franchisees are leaving faster than the franchisor can replace them, and some are leaving angry enough to hire attorneys. The FDD is not hiding this information. It is right there in Item 20. Reading it carefully is how you avoid becoming one of the exits counted in next year's tables.