How a Prospective Franchisee Can Review Item 20
When reviewing an FDD, whether you’re a prospective franchisee or
a franchise attorney, no one piece of information can be taken
independent of other information. However, data collected and
analyzed from the Item 20 tables can be used to construct a clearer
picture of how healthy a franchise system is.
The Franchisee Turnover Rate (FTR) can be a useful tool to
provide insight into existing and potential problems in a franchise
system. FTR is defined as a combination of terminated, non-renewed,
ceased operations and franchisor franchisee acquisitions posted in
Item 20 in the FDD.
When FranchiseGrade examined franchise systems with more than 100
units we found:
- 18% of all franchisors have a 3 year FTR higher than 10%.
- 38% of franchisors have a 3 year FTR of less than 5%.
- 12% of franchisors have a 3 year FTR of 1% or less.
Reviewing outlet turnover
The systems in the following graph
represent a sample from 1200 FDDs. Data is from 2013 FDDs.
Some of systems have a large number of
outlet FTR. Although a possible sign of problems, it's not
reasonable to make a final verdict on the health of a franchise
system based on this fact alone.
Coverall had over 2000 outlets terminated and only 20 ceased
operations in the 3 year period. Quiznos had only 93 terminated and
over 2200 cease operations. Even though both have similar aggregate
numbers, does the category within the FTR matter?
Snap-on Tool's 79% FTR is based on outlets
reacquired by the franchisor. Is this a sign of a franchise system
evolving and could this be interpreted as beneficial to incoming
Reviewing turnover rate percentages
Analyzing the FTR adds another piece of
data that can be combined with the above to make a more intelligent
Although both Subway and Coffee News had a
comparable large number of outlets turnover compared to most other
franchise systems, Subway's FTR is less than 1% compared to Coffee
News FTR of 14%.
It is easy to see that Quiznos data raises
some red flags. Quiznos has both a large number of outlets turnover
and one of the highest 3 year FTR in the industry. As additional
data is collected, a clearer picture will be drawn on the investment
worthiness of the franchise system.
FTR does not tell the whole story
Information within Item 20 is extremely
valuable when analyzing a potential franchise investment, but it may
not tell the whole story.
Even though 26% of their entire franchise
system turned over in 3 years, 86% of their FTR is because of ceased
An argument can be made that since it
franchises primarily to college students, who then graduate, move on
to their careers and cease operations as a College Pro Painter
Franchisee, this turnover may not indicate a problem but rather a
reflection of their business model.
Collection, analysis and interpretation of
data within the FDD is a critical component of a prospective
Franchisee's due diligence requirements and process. One cannot look
at one part of an FDD and make a determination on the health of a
franchise investment opportunity. Rather one needs to analyze every
Item, compare the data to other franchise systems and look at the
aggregate results to help narrow down your options and minimize your
Jeff Lefler is the CEO of
FranchiseGrade.com FranchiseGrade.com provides franchise investors
the opportunity to grade three comparative franchise systems as part
of their due diligence when searching for a franchise investment. It
also provides an analysis of FDD’s for Attorneys and investors.
© 2015 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating
Officer, FranchiseGrade.com. He is a former
franchise executive and franchisee. He can be contacted at 631-246-5782 or