Risk & Research 5 min read

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.

Item 20 openings vs closures · 2024 vintage

This registry does not compute a brand-level failure rate. In the 2024 Item 20 columns it does store, listed brands reported 20,690 openings against 16,726 closures in the most recent reported year.

20,690
Listed units opened (Item 20)
16,726
Listed units closed (Item 20)
223
Brands with Item 20 columns

Openings and closures are not a failure rate. Transfers, reacquisitions, and silent distress do not appear here. Verify in the current FDD.

Net unit growth rate by sector

Sector-average net growth (openings minus closures, as a rate), not a failure rate

% average net unit growth

What this shows Health & Fitness averages the strongest net unit growth in this registry; Business Services the weakest. Net growth is opened minus closed units, it is not a failure rate and does not capture transfers or reacquisitions.

Source PlainFranchise editorial comparison registry, FDD Item 20 As of 2024
Disclaimer: Franchise failure/closure data is imprecise and often understated in FDDs. This guide explains the data's limitations. Not financial advice.

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:

  1. Total "exits" = terminations + non-renewals + closures + transfers + reacquisitions
  2. Divide by the average total outlet count over the period
  3. 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 this registry actually stores

This comparison registry stores Item 20 opening and closure counts. It does not derive a termination-plus-non-renewal failure-rate percentage, and it does not invent one on franchise profile pages. Use the live opening and closure columns as a starting filter, then read the current FDD Item 20 tables for transfers, reacquisitions, and non-renewals.

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

Figures come from PlainFranchise's editorial comparison registry; not a verified FDD extract. The FTC Franchise Rule (16 CFR Part 436) still requires franchisors to provide a current FDD before a sale.

Next steps

Use net unit growth as a starting filter, then read Item 20's full transfer, reacquisition, and non-renewal columns before drawing a conclusion.

This guide is informational, not legal or investment advice. Net unit growth is not a failure rate.

PlainFranchise currently publishes an editorial comparison registry. This release does not yet link every displayed figure to its underlying FDD and retrieval date, so do not treat a registry value as a verified source record. Verify a material figure in the brand's current FDD before relying on it. See our editorial standards & corrections policy, the methodology behind these numbers, or report a data error.