22 Field guide entry

Validation calls

Sample Item 20's current and former lists. Ask operating questions the FDD cannot answer. Licensed and franchised are not the same population.

A sandwich counter with ingredients displayed behind glass along an assembly line

Item 20 requires contact information for current franchisees and for certain former franchisees. The FTC’s FDD walkthrough tells buyers to use those lists rather than a seller-selected sample. A franchisor may introduce enthusiastic operators. That is hospitality. It is not a sampling method.

A validation call is an operating interview. It is not a character reference, and it is not a substitute for the FDD. The filing tells you what the system discloses. Operators tell you how the disclosed machine felt from the line.

Build a sample, not a fan club

Copy the current list and the former list into a sheet. Then pick across three axes:

  • Vintage. One recently opened, one past the Item 7 “additional funds” window, one multi-year.
  • Geography and format. A suburban inline is poor evidence for an airport food court. Item 12 carve-outs exist because those sites are different businesses.
  • Status. Current operators, transfers, and people on the former-franchisee list.

Ten completed calls beat thirty scheduled voicemails. Keep a log: date, outlet identifier as listed, format, years open, and whether they were franchised, licensed, or company. If the list is short, that is itself a finding. A six-unit US system cannot produce a twenty-call sample.

Licensed versus franchised

Shah’s Halal Food’s FDD issued 10 April 2024 reported 58 total outlets as of 2023: 14 company, 0 franchised. The note on that record: forty-four of the 58 outlets operated under a license agreement rather than a franchise, and Item 20 stated that no franchises were operating as of the filing. A consumer locator showing dozens of shops can be accurate and still be the wrong population for a franchise validation.

If you are buying a franchise, call franchisees. If the system has almost none, you are interviewing a different legal relationship — licensees, affiliates, or company managers — and you should label the notes that way. Their occupancy deals, supply terms and exit rights may not travel.

Pepper Lunch’s May 2024 comparative record discloses 6 US units, all franchised, against an operator site claiming more than 500 locations across fifteen countries. International operators are not a US Item 20 sample. They can describe a kitchen. They cannot describe this filing’s support, fees or churn.

GDK’s FDD issued 3 September 2024 reported 7 units at year-end 2023, all franchised, and its Item 1 claimed nine open by issuance. That gap is a question for both the franchisor and the operators: which two opened, in what format, and were they in the Item 19 population?

You are a prospective franchisee doing due diligence, not a journalist and not opposing counsel. Stay inside operating facts. Do not ask anyone to recite another person’s confidential financials as if they were yours. Do not offer to share a pirated operations manual. Do not ask an operator to coach you around a non-compete.

A working script

  • When did you open, and which format is the shop — inline, end cap, food court, conversion?
  • How long from agreement to keys, and what slipped?
  • Who attended training, where, and did anyone have to repeat it?
  • How many people are on the clock at peak, and how many managers does the model actually need?
  • Which Item 6 charges showed up in the first year besides royalty and brand fund?
  • Which required purchases surprised you on price or on lead time?
  • How often does a field consultant visit, and what happens after a bad visit?
  • If you were transferring tomorrow, what would slow a sale?
  • For former franchisees: what ended the relationship, and what did the exit cost besides pride?

Hearing churn is a skill. Listen for transfers dressed as successions, reacquisitions dressed as strategy, and “we sold to a multi-unit group” dressed as a lifestyle choice. Item 20 already classified the movement. The call tells you which row a particular shop belonged to and whether the next buyer inherited a remodel bill.

Ask what changed after the period covered by Item 19, if the filing has one. GDK’s 2024 Item 19 used one franchised outlet at American Dream Mall, East Rutherford — the only unit open for the full year — and reported 2023 gross revenues of $1,383,053. That is a mall unit with a full-year history. A suburban inline opening next year is not that unit. The operator of that shop can describe a mall. Ask a different operator about a street box.

The Great Greek Mediterranean Grill’s FDD issued 17 August 2023 reports gross revenues, cost of goods and payroll for six affiliate restaurants, plus the highest and lowest of six franchise restaurants open two years. Franchisee calls are how you learn whether “open two years” still describes the shop you would build, and whether affiliate cost structure looks like a franchisee’s.

Mad for Chicken’s FDD issued 3 May 2024 reports unaudited 2022 and 2023 gross revenue for twelve affiliate outlets and three franchised outlets — revenue only, no costs or profit. Three franchisees is a small list. Call all of them. Then call affiliates only if you label those notes as affiliate notes.

Ingredients lined up behind glass along a sandwich assembly counter
A visible assembly line. An operator can tell you how many people that line needs at noon; the photograph cannot.

How to hear a polite non-answer

“Everything’s great, you should do it” is not data. Follow with a closed question: “If you had to pick one Item 7 row that overran, which was it?” Silence after a question about transfers is data. A request to take the conversation off the seller’s scheduled group call is data.

Group validation calls hosted by the franchisor are demonstrations. Take them, then book private calls from the list. Do not send the seller your call log. Do not promise operators confidentiality you cannot keep if you later litigate; you are taking notes for your own file.

If an operator asks what you were told in Item 19, do not recite a target as if it were their number. Ask how their format and year compare to the represented population. If the Item makes no representation — Shah’s Halal and The Halal Guys in the 2024 sources used here — do not fill the gap with the operator’s round number and call it diligence.

Brand in this set Item 20 population problem to keep in mind Source
Shah’s Halal Food 0 franchised / 44 licensed of 58 outlets as of 2023 FDD issued 10 April 2024
Pepper Lunch 6 US units in the filing; operator site claims 500+ internationally May 2024 comparative study of published FDDs
GDK 7 at year-end 2023; Item 1 claimed 9 by issuance FDD issued 3 September 2024
375° Chicken ‘n Fries 5 total, 2 franchised as of 2023 FDD issued 30 April 2024
Wienerschnitzel 323 total; large sample, but no right of renewal and no right to sell May 2024 comparative study of published FDDs

Asked in the field

Is it enough to call the three operators the seller introduces?
No. Those are a sample of convenience. Use the Item 20 lists and vary opening year, geography and status.
Can I ask a franchisee what they earn?
You can ask. They can refuse. A single unofficial number is still not an Item 19 representation.