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Prospective Franchisees Must Carefully Review Item 20

Published on June 26, 2017

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As part of your evaluation of a franchise opportunity and related due diligence, it’s important you carefully review the Franchise Disclosure Documents (FDD) with the assistance of qualified franchise counsel. Specific focus should be placed on certain items in the FDD, including but not limited to, the background and experience of franchisor management, litigation, investment, territory, financial performance and most importantly, franchise system growth and franchisee turnover.

Although each item in an FDD is important, some are more important than others. For example, Item 20 and its tables contain critical statistics that disclose franchise system growth, classification of franchisee terminations, franchises sold but not opened and other key data. A recent analysis by Franchise Grade® revealed that since 2010, 297 franchise systems, representing 13% of the franchises, had errors in their Item 20. The 3 franchise sectors that had the highest percent of franchise system errors are: Personal Services 25.6%, Quick Serve Restaurants 18.2% and Commercial and Residential Services 16.2%.

You can review the details here.

Let this be a warning to you to carefully review Item 20 in an FDD for errors. Although there can be changes in a franchise system from one year to another, the information disclosed in Item 20 should be accurate. If errors are found in an Item 20, you should assume that other items in the FDD such as Items 6 and 7 might also contain errors.

When evaluating a franchise opportunity, you need to confirm that the information in Item 20 is correct. To do otherwise, could lead to problems in your future.

About the Author: Ed Teixeira
Ed Teixeira is a recognized franchise expert with over 40 years’ experience in the franchise industry. He has served as a corporate executive for franchise firms in the retail, manufacturing, healthcare and technology industries and was a franchisee of a multi-million-dollar home healthcare franchise. Ed and Richard Chan are the authors of a new textbook, Franchising Strategies: The Entrepreneurs Guide to Success, to be published on July 1st by Routledge on July 1st. He has participated in the CEO Magazine Roundtable Meetings with business leaders from around the country and has spoken at a number of venues including the International Franchise Expo and Chinese Franchise Association in Shanghai, China. Over the course of his career, Ed has been involved with over 1,000 franchise locations and launched franchise concepts from existing business models. Ed can be contacted at [email protected]

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