FRANCHISE LAW
Keeping Item 20 and Item 3 Accurate at Renewal
Item 20 (outlets and franchisees) and Item 3 (litigation) change more than any other part of the FDD — and they are the first places state examiners and franchisee lawyers look. Most of the disclosure document is stable year to year; these two move every renewal, and small errors in them do outsized damage because they are easy to check against public records and against each other. Getting them right is less about drafting and more about disciplined record-keeping.
Item 20’s Five Tables
Item 20 presents the system’s outlet history in five required tables, covering the last three fiscal years plus a projection for the year ahead:
| Table | What it shows |
|---|---|
| Table 1 | Systemwide outlet summary — net change in franchised and company-owned outlets |
| Table 2 | Franchise transfers, by state, over three years |
| Table 3 | Status changes of franchised outlets (opened, closed, terminated, reacquired) |
| Table 4 | Status changes of company-owned outlets |
| Table 5 | Projected openings — signed but not yet open, and next year’s planned openings |
The discipline these tables demand is reconciliation. Opened, closed, transferred, and reacquired outlets have to add up year over year — the ending count one year is the starting count the next. Closures quietly dropped from the count, or transfers miscoded as new openings, are the kind of error a careful reviewer spots immediately, and they read as either sloppiness or concealment.
The Franchisee Roster
Item 20 also requires lists of franchisees. The disclosure must identify current franchisees and those who left the system during the last fiscal year, with the contact information a prospect needs to do diligence by calling existing and former operators. An outdated roster — missing recent departures, or listing operators who are long gone — undercuts the whole point of the item and signals that the renewal was rushed.
Item 3 Litigation and the Cross-Check
Item 3 requires disclosure of certain litigation involving the franchisor, its predecessors, affiliates, and the management people named in Item 2. At renewal, that means adding suits filed or resolved during the year and removing nothing that still must be disclosed. Omitting a relevant case is a material misstatement, not a clerical slip.
Item 3 and Item 20 are read together. A reviewer who sees high terminations in Table 3 will look to Item 3 for franchisee-initiated litigation, because the two together can signal a pattern of adversarial exits. Make sure the story the numbers tell in Item 20 is consistent with the litigation you disclose in Item 3 — inconsistencies between them are a classic audit flag and a gift to a plaintiff’s lawyer.
These are exactly the items that generate the common renewal mistakes franchisors most regret, and they sit alongside the audited financials and Item 19 as the heavy lifts in an annual update.
Why the Three-Year Lookback Matters
Item 20’s tables run on a three-year window, and that history is the point. A single year can hide a trend; three years of opens, closes, transfers, and terminations show whether a system is growing, churning, or stalling. Prospects and their advisors read the tables exactly that way, so franchisors are best served by tables that are accurate even when the trend is unflattering — a clean disclosure of a hard year is far safer than a number that does not reconcile. Build the current year’s figures off last year’s audited tables so the carryforward is exact.
The franchisee and former-franchisee lists exist so prospects can pick up the phone. Departed operators are often the most candid source a prospect has, which is why the Rule requires their contact information and why an incomplete or scrubbed list draws suspicion. Treat the roster as a feature of a confident system, not a liability to manage down.
Frequently Asked Questions
How many tables are in Item 20?
Five. They cover systemwide outlet counts, transfers, franchised-outlet status changes, company-owned status changes, and projected openings, over the last three fiscal years.
Whose contact information goes in Item 20?
Current franchisees and those who left the system during the most recent fiscal year, so prospects can contact existing and former operators directly.
What litigation must Item 3 disclose?
Certain pending and prior litigation involving the franchisor, its predecessors and affiliates, and the management individuals named in Item 2. When in doubt, ask franchise counsel rather than leaving a matter out.
Why are Items 20 and 3 reviewed together?
Heavy terminations in Item 20 paired with franchisee lawsuits in Item 3 can indicate adversarial exits. Examiners and prospects cross-check the two for consistency.
Item 20 and Item 3 reward good records and punish guesswork. Reidel Law Firm rebuilds and reconciles both as part of a flat-fee FDD renewal. Explore the Startup Franchising Package → or contact us to get your outlet and litigation disclosures audit-ready.
