Item 20: Outlets and Franchisee Information
Like the UFOC Guidelines, Item 20 of the amended Rule requires the disclosure of statistical information on the number of franchised outlets and company-owned outlets for the preceding three-year period. Note, however, that the tables in the amended Rule differ substantially from the version of these tables that may be familiar from the UFOC Guidelines. Item 20 of the amended Rule also differs from the UFOC Guidelines in the requirements for disclosure of contact information for former franchisees. In addition, Item 20 contains several new provisions pertaining to: (1) specific outlets offered for resale; (2) confidentiality agreements; and (3) trademark-specific franchisee associations.
Item 20 of the amended Rule requires five tables. The first table provides a systemwide summary of outlets, detailing the net changes in the number of outlets – both franchised and company-owned – over the last three fiscal years. The second tracks transfers of outlets, state by state, over the last three fiscal years. The third shows, state by state, changes in the status of franchised outlets over the last three fiscal years. Similarly, the fourth table displays, state by state, changes in the status of company-owned outlets over the last three fiscal years. Finally, the fifth table projects new outlet openings in each state. It also shows the number of franchise agreements that have been signed but have not yet resulted in the opening of an outlet.
Definitions Used in Item 20
When preparing the Item 20 tables, be aware that the various terms used have specific meanings, as outlined below.
- “Transfer” means the acquisition of a controlling interest in a franchised outlet, during its term, by a person other than the franchisor or an affiliate. It covers private sales of an outlet by the existing franchisee-owner to a new franchisee owner and the sale of a controlling interest in the ownership of a franchise.
- “Termination” means the franchisor’s termination of a franchise agreement prior to the end of its term without providing any money or other consideration to the franchisee (e.g., forgiveness or assumption of debt). For example, a franchisor may decide to terminate a franchisee for failing to abide by system health and safety standards. As a result, the franchisee leaves the system without receiving any payment or other consideration, such as cancellation of a debt owed to the franchisor.
- “Non-renewal” means failure to renew a franchise agreement for a franchised outlet upon the expiration of the franchise term. For example, a franchisee may operate a franchise for period of 10 years. At the conclusion of the 10-year term, the franchisor (or franchisee) may decide not to renew the franchise agreement.
- “Reacquisition” means the return of a franchise outlet during its term to the franchisor in exchange for cash or some other consideration, including the forgiveness of a debt. For example, during the course of a franchise agreement, a franchisee may wish to terminate its relationship with the franchisor, and the franchisor may agree to buy back the outlet for cash or to forgive overdue royalty payments.
- “Ceased operation” means the cessation of business operations for any reason other than transfer, termination, non-renewal, or reacquisition. It includes abandonment of the outlet by a franchisee. It also includes franchisees in an “inactive” status.
General Instructions for Preparing Item 20 Tables
The Item 20 tables are designed to capture changes in ownership status. In some instances, there may be multiple changes in ownership or multiple owners of an outlet over the course of a fiscal year. The amended Rule provides the following instructions in order to characterize properly all such changes in status.
Multiple Events Affecting the Status of a Particular Franchise Outlet
Several changes in the status of a particular outlet may occur over the course of a fiscal year. For example, during a single fiscal year, a franchisee may cease operations and the franchisor may respond by terminating the franchisee’s franchise agreement. Where there are multiple events such as these affecting a particular outlet, the amended Rule provides that only the last event for that specific outlet need be reported. In the example above, since termination was the last event, the change in status should be reported only as a termination. Franchisors are permitted to add a footnote to the chart to explain the series of status changes, but except in the case of multiple franchise owners, as discussed below, are not required to do so.
Table No. 1 – Systemwide Outlet Summary
Table No. 1 of Item 20 presents the total number of all outlets nationwide – both company owned and franchised – operating at the beginning and at the end of each of the franchisor’s last three fiscal years. This chart should include all outlets that are substantially similar to those being offered for sale to prospective franchisees. The table is intended to show the net change – positive or negative – in the number of operating franchised and company-owned outlets over time.
This article is part of a series of articles on starting a franchise in Minnesota.
CREDIT: The content of this post has been copied or adopted from the Federal Trade Commission’s Franchise Rule Compliance Guide.