Franchise Failure Rates: What the Data Shows
What do FDD Item 20 disclosures reveal about franchise termination and non-renewal rates? What the data shows, and what it doesn't.
The Industry Myth vs. Reality
The franchise industry often cites low failure rates, sometimes as low as 5% compared to 50%+ for independent businesses. The truth is more complicated, and the data in FDDs reveals it.
What FDD Item 20 Actually Shows
Item 20 requires franchisors to disclose, for each of the last three years:
- Number of outlets opened
- Number of outlets closed (voluntary)
- Number terminated (forced by franchisor)
- Number not renewed at contract end
- Number reacquired by franchisor
- Number transferred to new operators
What "Failure" Doesn't Capture
FDD closure data systematically understates actual failure rates because:
- Transfers - A struggling franchisee who sells to a new operator doesn't show as a failure, even if they lost money
- Reacquisitions - When a franchisor buys back a failing location, it disappears from the franchisee count
- Silenced operators - Many franchisors require non-disclosure agreements when terminating franchisees
- No profitability data - A location can stay open for years while the franchisee loses money
How to Calculate a Meaningful Closure Rate
From Item 20 data, you can calculate a more honest picture:
- Total "exits" = terminations + non-renewals + closures + transfers + reacquisitions
- Divide by the average total outlet count over the period
- Compare this across 3 years, is the rate stable, improving, or worsening?
For established systems, an annual exit rate above 10–12% is concerning. Below 5% in a stable system is generally healthy.
Red Flags in Item 20 Data
- Rising termination rate year-over-year
- High reacquisition rate (franchisor buying back failing units)
- More locations closing than opening (negative net growth)
- High transfer rate (potentially struggling franchisees selling out)
- Dramatically different data for company-owned vs. franchised locations
What PlainFranchise's Failure Rate Data Shows
Where available, we calculate a failure rate indicator from FDD Item 20 disclosures, specifically, the sum of terminations and non-renewals as a percentage of total outlets over the most recent reported year. This is conservative and may understate true operational failure.
This metric is available on individual franchise profile pages where the data is disclosed in the FDD.
The Bottom Line on Franchise Failure Data
- Don't trust headline statistics from franchise industry associations
- Read Item 20 carefully and calculate your own exit rates
- Talk to franchisees who left the system, they're listed in Item 20 and you can contact them
- Ask the franchisor directly: "Why did franchisees in the closed list stop operating?"
- A low official failure rate can mask a high rate of financial distress that doesn't show in the data
Common Questions
Are franchises safer investments than independent businesses?
The evidence is mixed. Some academic studies show comparable failure rates. The advantage franchises have is brand recognition and proven systems. The disadvantage is significant financial obligations (royalties, fees) that reduce margins and make profitability harder during ramp-up.
How do I find former franchisees to speak with?
Item 20 of the FDD lists former franchisees with contact information (name, address, phone). You're legally entitled to contact them. This is one of the most valuable due diligence steps available to prospective buyers.
How to Read Franchise Failure Data
"Franchise failure rate" is a frequently misused term. The FTC's Franchise Rule does not require disclosure of "failure"; instead, FDD Item 20 discloses outlet status across three fiscal years, opens, closes, transfers, terminations, non-renewals, and ceased operations. Each category means something different. A "transfer" is often a healthy ownership change; a "termination" by the franchisor signals franchisee non-compliance; a "non-renewal" can be franchisee or franchisor-initiated; a "closure" without transfer indicates the unit ceased operating entirely. When evaluating a specific franchise, request the franchisor's three-year Item 20 history and contact at least 10 current franchisees plus several former franchisees from the Item 20 contact list.
Related
Data sourced from FDDs filed with the FTC under 16 CFR Part 436. Compiled by PlainFranchise Editorial.