Buying a US Franchise: Check Outlet Closures and Turnover

A franchise brand can announce new openings while existing outlets quietly close or change hands. Before buying a US franchise, examine what happens to established locations, not just how quickly the network grows. Outlet turnover can reveal questions about business viability, franchisee relationships and the demands of ownership. It is a useful way to assess the health of a franchise community without mistaking expansion for success.

Start with Item 20, not the opening announcements

The Federal Trade Commission’s Franchise Rule, at 16 CFR Part 436, requires covered franchise sellers to provide a Franchise Disclosure Document (FDD). Its 23 disclosure items include Item 20, which reports information about outlets and franchisees.

Item 20 includes tables covering the previous three fiscal years. These distinguish franchised outlets from company-owned outlets and show changes such as openings, transfers, terminations, non-renewals, reacquisitions by the franchisor and outlets that ceased operating for other reasons. It also includes information about projected openings and franchisee contacts.

Under the federal rule, you must receive the FDD at least 14 calendar days before signing a binding agreement with, or paying money to, the franchisor or its affiliate in connection with the proposed franchise sale. Use that review period to investigate the outlet history rather than simply waiting for the signing date.

State franchise registration, disclosure and relationship laws may also apply. Registration is not a government endorsement of the business opportunity, and federal disclosure compliance does not establish that a particular outlet is financially sound.

Separate growth from changes in ownership

Create a simple worksheet for each disclosed year. Record the number of franchised outlets at the start and end, new openings, transfers, terminations, non-renewals, reacquisitions and other cessations. Keep company-owned outlets separate.

Then examine what each category actually tells you:

• New openings: These show expansion, not whether the new businesses are profitable or adequately funded.
• Transfers: An outlet may continue trading under a new franchisee. A transfer could represent a successful sale, a planned retirement or an owner’s attempt to escape losses.
• Terminations and non-renewals: These identify contractual outcomes, but do not explain the full commercial circumstances.
• Reacquisitions: The franchisor taking over an outlet may reflect a strategic purchase or an attempt to stabilise a struggling business.
• Other cessations: These need explanation rather than an automatic assumption that every closure represents the same problem.

Do not add every category together and label the result a “failure rate”. A transfer is not necessarily a closure, and an outlet can experience more than one event. Read the table notes and ask how multiple events affecting the same location have been reported.

Net growth can also conceal substantial losses of established outlets. Compare openings and departures separately before deciding what the overall increase means.

Investigate patterns relevant to your proposed outlet

National totals can hide local weaknesses. Look at the state-level information and ask whether departures cluster in markets, formats or operating conditions similar to yours.

For example, problems at shopping-centre locations may deserve particular attention if you plan to lease similar premises. Equally, the experience of an established drive-through outlet may tell you little about a newer delivery-only format.

Ask the franchisor for written explanations of material patterns:

• Were departing outlets recently opened or long established?
• Did closures follow lease expiry, persistent losses or contractual disputes?
• Were reacquired locations subsequently reopened, resold or closed?
• Have the same locations changed ownership repeatedly?
• What changed in site selection or operating support after those events?

The FDD may not answer all these questions. Treat additional explanations as information to verify, not substitutes for the required disclosures.

Use the current and former franchisee contact information in Item 20 to check specific events. Focus on what happened to the location: whether it continued trading, why ownership changed and whether the owner recovered their investment. Respect that confidentiality obligations may limit what someone can share. An unanswered call or refusal to comment does not itself prove a problem.

Turn the findings into a buying decision

Give your accountant the outlet worksheet alongside your proposed business plan. Ask whether the patterns suggest that your assumptions about the trading ramp-up, occupancy costs or working capital need more cautious testing.

Ask your franchise lawyer to assess unexplained inconsistencies between Item 20, the franchisor’s account and the documents you are being asked to sign. A repeated pattern of disputed departures deserves scrutiny even when the brand continues expanding.

Before proceeding, identify which concerns are resolved, which remain uncertain and which would change your decision. Ask whether there have been significant outlet changes since the reporting period and request any updated FDD available.

Practical takeaway: Follow the history of existing outlets before paying for a new one. Understand the reasons behind closures and ownership changes, and pause if material patterns remain unexplained.