The Item 20 report refers to a specific section within the Franchise Disclosure Document (FDD) that franchisors are required to provide to prospective franchisees. The FDD is a legal document that outlines the terms and conditions of the franchise agreement and provides detailed information about the franchisor's business, allowing potential franchisees to make an informed decision about whether to invest in the franchise. In this article, we will demonstrate how to access the Item 20 report within the FranConnect system, outline its components, and provide guidance on interpreting the information presented.
Topics
- Accessing the Item 20 Report
- System Wide Outlet Summary
- Transfers of Outlets from Franchisees to New Owners (Other than the Franchisor)
- Projected Openings
- Status of Franchised Outlets
- Status of Company-Owned Outlets
Accessing the Item 20 Report
To access the Item 20 report, first log into your FranConnect system. Next, click Info Manager on the left-hand sidebar and then select Reports from the drop-down menu.
In the box on the left-hand side of the ensuing page, click Item 20 Reports.
On the next page, click FDD Item 20 Report.
You will be taken to the following page, where you have access to five different reports.
Next, we will take a look at the five main reports that can be found on this page.
System Wide Outlet Summary
The "System Wide Outlet Summary" in the Item 20 report provides an overview of the franchisor's entire network of outlets. It offers a snapshot of the franchise system's size and growth over a specified period, typically the last three fiscal years.
The "System Wide Outlet Summary" report has three columns. Let's take a closer look at each one:
- Outlets at the Start of the Year: This column represents the number of open locations as of January 1st of the report year. This number is calculated using the unit's opening date or expected opening date in FranConnect.
- Outlets at the End of the Year: This column represents the number of open locations as of December 31st of the report year. This number is calculated using the unit's opening date or expected opening date in FranConnect.
- Net Change: This column represents the change in the number of open units from the beginning of the report year to the end. To calculate this, subtract the "Outlets at the Start of the Year" column from the "Outlets at the End of the Year" column.
By reviewing the "System Wide Outlet Summary," prospective franchisees can gain insights into the growth trajectory, expansion, and stability of the franchise system. This information helps potential investors understand the overall health of the franchise and assess the potential risks and rewards associated with investing in that specific franchise.
Transfers of Outlets from Franchisees to New Owners (Other than the Franchisor)
The "Transfers of Outlets from Franchisees to New Owners (Other Than the Franchisor)" section of the Item 20 report refers to the disclosure of information about the number of franchise outlets that have been transferred from one franchisee to another independent owner (excluding the franchisor) during a specified reporting period, typically the past three fiscal years.
This section provides important insight into the stability and desirability of the franchise system. A high number of transfers might indicate issues with the franchise system, such as unsatisfactory profitability, inadequate support, or high franchisee turnover. Conversely, a low number of transfers could suggest that the franchisees are generally satisfied with the franchise system and are less likely to exit the business or transfer ownership. It is crucial for potential franchisees to consider this information, along with other sections in the FDD, to make an informed decision before investing in a franchise.
The "Transfers of Outlets from Franchisees to New Owners (Other Than the Franchisor)" report has three columns. Let's take a closer look at each one:
- State: This column shows the state in which the unit operates.
- Year: This column shows the year of the report. The last three fiscal years from the chosen filtered year will be displayed.
- Number of Transfers: This column shows the number of transfers that occurred within the corresponding year. This is calculated using the transfer date users input in the FranConnect system when they complete a transfer.
Projected Openings
The "Projected Openings" section of the Item 20 report provides information about the expected future growth and development of a franchise system. This report is required by the Federal Trade Commission (FTC) in the United States for franchisors to provide to prospective franchisees during the franchise sales process.
The "Projected Openings" report has four columns. Let's take a closer look at each one:
- State: This column shows the state in which the unit operates.
- Agreements Signed But Outlet Not Opened: This column shows all outlets with signed agreements that have not been opened yet. All results displayed have projected openings in the filtered time frame.
- Projected New Franchised Outlet In The Next Fiscal Year: This column shows all new franchises projected to open in the next fiscal year. This is calculated using the expected opening date for any franchises in Opener in the "In Development" lifecycle stage.
- Projected New Company-Owned Outlet In the Next Fiscal Year: This column shows all new corporate locations projected to open in the next fiscal year. This is calculated using the expected opening date for any corporate locations in Opener in the "In Development" lifecycle stage.
The information provided in the "Projected Openings" section can help potential franchisees assess the growth prospects of a franchise system, and understand the franchisor's expansion plans and strategies. However, it's essential for prospective franchisees to conduct their own due diligence and consider the risks involved in opening a franchise, as these projections are not guaranteed and can be influenced by various factors.
Status of Franchised Outlets
The "Status of Franchised Outlets" section of the Item 20 report, which is part of the Franchise Disclosure Document (FDD), provides a snapshot of the franchise system's performance and growth over a specified period, typically the past three years. This section is crucial for prospective franchisees as it helps them evaluate the stability and overall health of the franchise system.
The "Status of Franchised Outlets" report has nine columns. Let's take a closer look at each one:
- State: This column shows the state in which the unit operates.
- Year: This column shows the year of the report. The last three fiscal years from the chosen filtered year will be displayed.
- Outlets at Start of Year: This column shows the number of franchises open at the start of the year. This number is determined using the opening date of open units in FranConnect.
- Outlets Opened: This column shows the number of franchises opened during the denoted year. This number is determined using the opening date of open units in FranConnect.
- Terminations: This column shows the total number of franchised units terminated during the denoted year. This number is determined using the termination date of terminated units in FranConnect.
- Non-Renewals: This column shows the total number of franchised units whose agreements were not renewed during the denoted year. This number is determined using the expiration date of the agreement in FranConnect.
- Reacquired by Franchisor: This column shows the total number of franchises that were reacquired by the franchisor during the denoted year. This number is determined using the change date the user inputs when changing the Franchisee type in FranConnect.
- Ceased Operations-Other Reasons: This column shows the total number of franchises that ceased operations for reasons not covered in the previous columns during the denoted year. This number is determined using the termination date for all units that fit this category in FranConnect.
- Outlets at the End of the Year: This column shows the number of franchises open at the end of the year. This number is determined using the opening date of open units in FranConnect that have not been closed in the denoted year.
By examining this data, potential franchisees can gain insights into the franchise system's historical performance, trends, and any potential red flags, such as a high number of closures or terminations. This information can help them make informed decisions about whether to invest in the franchise and what to expect in terms of support and success.
It's important for prospective franchisees to remember that past performance does not guarantee future results, and they should conduct thorough due diligence, including talking to current and former franchisees, before making any investment decisions.
Status of Company-Owned Outlets
The "Status of Company-Owned Outlets" section of the Item 20 report provides an overview of the franchisor's company-owned outlets over a specified period, typically the past three years. This section is important for prospective franchisees as it helps them understand the franchisor's commitment to operating its own units and gain insights into the overall health and performance of the franchise system.
The "Status of Company-Owned Outlets" report has nine columns. Let's take a closer look at each one:
- State: This column shows the state in which the unit operates.
- Year: This column shows the year of the report. The last three fiscal years from the chosen filtered year will be displayed.
- Outlets at Start of Year: This column shows the number of outlets open at the start of the year. This number is determined using the opening date of open units in FranConnect.
- Outlets Opened: This column shows the number of outlets opened during the denoted year. This number is determined using the opening date of open units in FranConnect.
- Reacquired From Franchisee: This column shows the total number of outlets that were reacquired from a franchisee during the denoted year. This number is determined using the change date the user inputs when changing the Franchisee type in FranConnect.
- Outlets Closed: This column shows the total number of outlets that were closed during the denoted year. This number is determined using the termination date for any outlets that have been terminated.
- Outlets Sold to Franchisee: This column shows the total number of outlets sold to a franchisee during the denoted year. This number is determined using the change date for all units that fit this category in FranConnect.
- Outlets at the End of the Year: This column shows the number of company-owned outlets open at the end of the year. This number is determined using the opening date of open units in FranConnect that have not been closed in the denoted year.
By reviewing this data, potential franchisees can assess the franchisor's commitment to operating and maintaining company-owned units, which can be an indicator of how well the franchisor understands its own business model, the potential challenges franchisees may face, and the level of support they can expect.
As with any investment decision, prospective franchisees should conduct thorough due diligence and consider all available information, including talking to current and former franchisees, before making any commitments. It's important to remember that past performance does not guarantee future results.
Conclusion
Having read this article, you should know how to access the Item 20 report within the FranConnect system, as well as how to use and interpret it.