Franchise Closure Rates and Turnover by Sector: FDD Item 20 Index

Franchise closure rates by sector: the Item 20 turnover index

The index below reports each Item 20 event as a percentage of the franchised outlets a system had at the start of its latest fiscal year. Across 220 franchise systems with at least one franchised outlet, the median system recorded exits (terminations, non-renewals, reacquisitions and ceased operations) equal to 4.7% of its starting outlets, with the middle half of systems between 0.8% and 10.0%. Adding transfers to new owners, the median gross churn was 9.8% (interquartile range 4.6% to 16.1%).

Fitness (16.2%), Lodging (15.6%) and Retail (14.0%) had the highest median gross churn; Business services (5.0%) and Entertainment and recreation (5.8%) had the lowest. Those sector gaps are smaller than the spread inside each sector. A Kruskal-Wallis test does not separate the 14 sectors on exit rates (p = 0.186) and only weakly on gross churn (p = 0.08). With 11 to 23 systems per sector, read each row as a range, not a ranking.

Component columns (terminations, non-renewals, reacquisitions, ceased operations) are pooled rates, the sum of events divided by the sum of starting outlets, because the median system recorded no terminations, non-renewals or reacquisitions in the year (median 0.1%, 0.0% and 0.0%). Pooled rates weight large systems more heavily. The sample is quota-stratified by sector (up to 18 brands per sector, 27 for food), so the all-sample row describes this sample, not every US franchise system.

What franchise turnover is made of

Transfers are the largest single form of turnover. Of 5,416 turnover events disclosed for the latest fiscal year across the 220 systems, 43.2% were transfers to new owners, 20.6% were ceased operations, 20.1% terminations, 9.2% reacquisitions by the franchisor and 6.9% non-renewals. Transfers were the largest type in 10 of the 14 sectors.

A transfer usually leaves the outlet open under a new owner; FTC staff note that a transfer generally does not change the number of operating outlets (Compliance Guide, p. 98). Terminations, non-renewals, reacquisitions and ceased operations remove an outlet from the franchised count, but not always from business: a reacquired outlet may keep trading as a company unit, and the FTC warns that some franchisors buy back failed outlets and list them as company-owned (FTC consumer guide). Item 20 does not say how many exits were business failures.

Home services, cleaning and restoration, and business services systems had the highest termination shares; automotive had the highest reacquisition share. Pooled across all systems, the 49,353 franchised outlets at the start of the year saw 2,338 transfers, 1,090 terminations, 1,116 ceased operations, 497 reacquisitions and 375 non-renewals.

Gross churn versus net growth

Net unit growth understates how much a franchise system changes in a year. Pooled across the sample, gross churn was 11.0% of starting franchised outlets while net growth was 2.2%, so churn ran about 5.0 times net growth. For the median system, gross churn was 9.8% and net growth 3.2%.

Gross churn exceeded net growth in 58.6% of systems. The pattern holds even where systems grew, though less often: among the 129 systems that ended the year with more franchised outlets, the median system still churned 7.1% of its outlets (net growth 14.3%), and churn exceeded net growth in 33.3% of them. 35.0% of systems ended the year with fewer franchised outlets than they started with.

The pooled net growth of 2.2% sits close to the IFA and FRANdata forecast of 1.5% growth in franchise establishments for 2026, a different measure that includes franchisor-owned units. Sector medians of net growth range from -2.3% (Lodging) to 33.3% (Entertainment and recreation).

Small franchise systems versus large ones

Small systems mostly report no exits at all, but when they lose an outlet it is a large share. 78.6% of the 28 systems with 1 to 9 franchised outlets reported zero exits in the year, against 2.3% of the 44 systems with 250 or more. Among small systems that did record an exit, the median exit rate was 41.7%, because one closure in a five-outlet system is 20%.

Weighted by outlets and pooled over the three fiscal years each FDD shows, systems with 25 to 99 outlets lost the largest share (8.4% and 9.3% a year) and systems with 250 or more outlets the smallest (5.2%). At the brand level there is no clear size gradient: among systems with 10 or more outlets, the Spearman correlation between system size and the exit rate is 0.07 (p = 0.317) for the latest year and -0.08 (p = 0.299) over three years.

The brief for this report expected the highest exit rates in small systems. The data do not show that as a typical-system result; they show lumpy outcomes in small systems and lower outlet-weighted exit rates in the largest systems.

Young versus mature franchise systems

Years franchising comes from Item 1, where franchisors state when they, a predecessor or an affiliate began offering franchises for the concept; 213 of 220 systems state it. Young systems look like small systems: 69.6% of systems franchising under 5 years recorded no exits in the latest year, and their median net growth was 90.9%.

Weighted by outlets over three fiscal years, systems franchising under 10 years lost 8.5% and 8.0% of their franchised outlets a year, against 4.8% for systems franchising 35 years or more. The brand-level correlation between years franchising and the three-year exit rate is close to zero (0.02, p = 0.81), so the age difference shows up in outlet-weighted totals, not in the typical system.

Mature systems combine more exits with more transfers: systems franchising 35 years or more had the highest median gross churn (12.8%) and a median net change of -3.4%.

Zero-exit systems and the high-exit tail

49 of the 220 systems (22.3%) disclosed no terminations, non-renewals, reacquisitions or ceased operations in their latest fiscal year, and 14.1% had no exits and no transfers. At the other end, the top decile of systems lost 17.1% or more of their starting franchised outlets in one year; 14 systems lost 20% or more.

The high-exit tail is not mainly a small-system effect. The 22 systems at or above the top-decile threshold had a median of 54.5 franchised outlets at the start of the year (against 91.5 for the rest), 27.3% had fewer than 25 outlets and 18.2% had been franchising under 10 years. This report does not name systems in either group; the counts behind every system are in the downloadable dataset as disclosed in each FDD.

How franchise closure rates here compare with other research

Recomputed on the same definition, this sample matches the largest recent third-party FDD analysis closely. VetMyFranchise reports a median single-year closure rate of 4.7% (terminations, non-renewals and ceased operations, reacquisitions excluded) across 858 systems with 25 or more franchised outlets in 2025 and 2026 filings. For the 166 systems in this sample with 25 or more outlets, the same measure has a median of 4.8%, a 75th percentile of 9.6% (9.5% in that analysis) and a 90th percentile of 15.9% (16.2%). That analysis is a non-peer-reviewed third-party study and its dataset is not public; the agreement is a consistency check, not a confirmation.

The academic benchmark is older. Holmberg and Morgan (2003) found median franchisee turnover including transfers of 10.49% in 1997, from state registration data on more than 800 systems; this sample’s median gross churn is 9.8%. Their data came from the pre-2008 UFOC format, which the FTC said produced double-counting and inflated turnover rates (72 FR 15501).

Census data measure something else. The Business Dynamics Statistics put the 2023 exit rate of all US employer establishments at 9.4%, where an exit means employment fell to zero (Census definition); a franchise exit in Item 20 can be an outlet that keeps operating independently or under the franchisor. Survival studies of new franchised businesses, such as Lafontaine, Zapletal and Zhang, are covered in our franchise failure rate review and are not repeated here.

What Item 20 can and cannot tell a buyer

Item 20 is the standardized record of outlet turnover that every franchisor covered by the FTC Franchise Rule must disclose. The Rule requires every franchisor to disclose outlet counts for its last three fiscal years, with a separate table of transfers and a table of franchised-outlet status by state (16 CFR 436.5(t)). In its 2007 rulemaking the FTC declined to require a turnover percentage, saying buyers can calculate turnover from Tables 1 and 3 (72 FR 15503).

• It shows how many franchised outlets opened, transferred, were terminated, were not renewed, were bought back or stopped operating, by state and year, for three years.
• It does not show why. FTC staff give a breach of system health and safety standards as one example of a termination; a ceased operation can be a closure, an abandonment or an inactive franchisee; a non-renewal can be the franchisee’s choice. Table 2 does not say why an outlet was sold.
• Each outlet is counted once a year. Where several events affect one outlet, only the last is reported (FTC Compliance Guide, p. 97), so a closure that followed a transfer shows only as the closure.
• Pre-opening failures are not in the tables. Buyers who signed but never opened are listed by name, not counted in Table 3 (FTC FAQ 19; NASAA commentary 20.1).
• Three years is a short window. A system’s fiscal year may not be the calendar year, and a one-year rate in a small system moves sharply with a single event.
• Former franchisees are listed. Item 20 must list franchisees who left in the last fiscal year or have not communicated with the franchisor within 10 weeks, and say whether franchisees signed confidentiality clauses (16 CFR 436.5(t)(5) and (t)(7)). The FTC consumer guide says talking to current and former franchisees may be the most reliable way to verify a franchisor’s claims.

To compute a closure rate for one system, divide the year’s terminations, non-renewals, reacquisitions and ceased operations in Table 3 by the outlets at the start of that year, repeat for each of the three years, and read transfers from Table 2 separately. Compare the result with the sector range in the index above, not with a single average. Our guide to buying a franchise covers the rest of the FDD review, and franchise agreement terms covers the renewal clauses behind non-renewals.

Methods in brief

The sample is the same 259 brands used in our franchise royalty rates index: one Clean FDD per brand from Minnesota CARDS, issued 2025-01-24 to 2026-08-18, quota-stratified across 14 sectors. One FDD was dropped from the statistics because it is a second Minnesota registration of the same franchisor’s Item 20 system, leaving 258 systems; 38 had no franchised outlets at the start of the latest year and are excluded from rates, leaving 220. The latest fiscal year is FY2025 for 195 systems, FY2024 for 60 and FY2026 for 3 (non-calendar fiscal years ending in 2026).

A parser drafted Tables 1 to 3 from the PDF text, and every FDD was then read to confirm or correct the totals rows and the Item 1 franchising start year. A random hand check of 20 systems found 0 errors in 240 fields after adjudicating two disagreements. 11 systems’ disclosed Table 3 totals do not add up; they are kept as disclosed, and excluding them moves the median exit rate from 4.7% to 4.4%. Full details are in the methodology below.