SOLD, NOT OPEN… WHY TOO MANY FRANCHISES “IN DEVELOPMENT” CAN BECOME A WARNING SIGN IN ITEM 20 OF THE FDD

Photo By Windo Nugroho

A large development pipeline can make a franchise brand look powerful. It can also hide a dangerous truth. Units sold but not yet open prove that the franchisor can award franchises. They do not prove that franchisees are getting open, operating well, or building successful businesses. For serious candidates, lenders, investors, and franchisors themselves, the real question is not how many deals were sold. The real question is how many franchisees successfully make it from signature to opening day, and what happens after that.

SOLD, NOT OPEN… WHY TOO MANY FRANCHISES “IN DEVELOPMENT” CAN BECOME A WARNING SIGN IN ITEM 20 OF THE FDD

By: Gary Occhiogrosso, Founder & Managing Partner Franchise Growth Solutions 

The Pipeline Can Flatter the Brand Before It Tells the Truth

In franchising, growth has a way of seducing everyone in the room.

A franchisor says it has 40 units in development. A broker hears momentum. A candidate hears validation. A lender hears market demand. A private equity group hears future royalty streams. The number sounds impressive because it suggests the brand is moving, that the market has spoken, and that franchisees are lining up to be part of the story.

But “in development” is not the same as open. It is not the same as profitable. It is not the same as trained, staffed, leased, built, financed, inspected, launched, or supported.

That distinction matters more today than it did in easier capital markets. Franchise growth is still projected to expand. The International Franchise Association’s 2026 Franchising Economic Outlook expects the number of U.S. franchise establishments to grow from 832,521 to 845,000 units, while franchise employment is projected to reach nearly 8.9 million jobs. That is a powerful macro story. Yet beneath the national growth figures, individual franchise systems live or die on execution, not projections.

The danger appears when a franchisor confuses franchise sales velocity with franchise system health. A brand may be skilled at generating leads, selling the dream, and closing agreements. That is valuable, but it is only the first act. The real franchise business begins after the check clears and the franchisee must find a site, secure financing, complete construction, hire a team, pass inspections, train, open, and produce enough revenue to justify the investment.

A large sold but not open pipeline, often referred to as SNO, can be a sign of confidence and expansion. It can also be a sign of congestion, weak qualification, unrealistic territory awards, capital gaps, site selection problems, construction delays, franchisee hesitation, or insufficient franchisor support. The number itself does not answer the question. It raises the question.

What Item 20 Actually Shows

Item 20 of the Franchise Disclosure Document is one of the most important sections in the FDD because it shows the outlet history of the franchise system. Under the FTC Franchise Rule, Item 20 requires franchisors to disclose systemwide outlet information, transfers, status changes of franchised outlets, status changes of company owned outlets, and projected openings.

The part that deserves special attention is Table 5, which addresses projected openings. Table 5 requires disclosure, by state, of franchise agreements signed but outlets not opened as of the end of the franchisor’s last fiscal year. It also requires disclosure of projected new franchised and company owned outlets for the next fiscal year.

That sounds straightforward, but it is often misunderstood. The signed but not opened column is not a victory column. It is a pipeline column. It tells the reader that franchise agreements exist for outlets that were not open as of the reporting date. It does not tell the reader whether those franchisees have secured locations, obtained financing, signed leases, started construction, completed training, or remain fully committed.

The FTC Compliance Guide makes clear that Table 5 addresses two issues, agreements signed but outlets not opened, and projected new franchised and company owned outlets. It also states that projections must have a reasonable basis, and that a franchisor may consider historical market trends and its own track record when making those projections.

That phrase, “own track record,” is where the real analysis begins.

If a franchisor has historically converted signed agreements into open units at a high rate, and within a reasonable period, a large SNO number may be a healthy sign. It may mean the system has disciplined development, strong franchisee demand, reliable site selection, available capital, and the operating infrastructure to support openings.

If the franchisor has a thin operating base, slow openings, stalled franchisees, repeated delays, or a pattern of signed deals that never materialize, a large SNO number may be something very different. It may be evidence that the sales function is ahead of the support function.

The SNO Question Every Candidate Should Ask

The most important Item 20 question is not, “How many units are in development?”

The better question is, “How many of the units sold actually open, how long does it take them to open, and what condition are those franchisees in by the time they begin operating?”

That is the SNO question.

A signed franchise agreement is a legal and commercial event. An open franchise location is an operating reality. Between those two points sits the most fragile stage of the franchise relationship. This is where optimism meets landlords, lenders, zoning boards, contractors, permits, equipment vendors, construction costs, utility delays, staffing shortages, and working capital requirements.

For many emerging franchisors, the preopening process is where the brand first discovers whether its model is truly scalable. The original company owned location may have worked because the founder knew every vendor, watched every dollar, trained every employee personally, and made decisions instinctively. That is not a franchise system. That is founder dependence.

A franchise system must be transferable. It must take people who did not invent the concept and give them the tools, training, standards, economics, and support to open and operate the business with discipline. If franchisees are signing but not opening, the franchisor must look beyond sales and ask whether the model is genuinely ready for replication.

Why “In Development” Is Not the Entire Story

The phrase “in development” is one of the most overused phrases in franchise sales.

It can mean a franchisee signed yesterday and is moving quickly toward a lease. It can mean a multiunit developer has territory rights but no site under control. It can mean a candidate paid a franchise fee but has not found financing. It can mean a former prospect is technically still under agreement but functionally inactive. It can mean a deal that looks alive in the FDD but is unlikely to become an operating location.

Without context, the number is incomplete.

A sophisticated reader wants to know the aging of the pipeline. How many signed agreements are less than six months old? How many are between six and twelve months old? How many are older than a year? How many are older than eighteen months? How many have approved sites? How many have signed leases? How many have financing commitments? How many are in construction? How many have completed training? How many are delayed because of the franchisee, and how many are delayed because of the franchisor’s process?

Those questions separate momentum from backlog.

A healthy pipeline has movement. Deals advance through defined stages. Candidates become franchisees. Franchisees become operators. Operators become validators. Validators help the next generation of candidates make better decisions.

An unhealthy pipeline accumulates. It gets larger but not stronger. The franchisor keeps selling because new sales create the appearance of progress, while the older sales sit unresolved. That can create a dangerous illusion. The brand looks larger than it is, while the operational system remains too small, too young, or too strained to carry the growth story.

The Risk of Selling Ahead of the Infrastructure

There is a moment in the life of many young franchise systems when selling franchises feels easier than opening them.

Lead generation begins to work. Brokers show interest. A few strong candidates say yes. The founder gains confidence. The Item 20 pipeline grows. The sales deck gets stronger. The brand starts using phrases like “rapid expansion,” “national growth,” and “multiple markets under development.”

Then reality begins to tighten.

The franchisor needs a real estate process. It needs demographic standards. It needs site approval discipline. It needs construction specifications. It needs vendor capacity. It needs a training calendar. It needs field support. It needs opening support. It needs a franchisee communication cadence. It needs a technology stack. It needs a capital plan. It needs a realistic understanding of how long it takes to go from agreement to open.

If those pieces are not in place, the franchisor may unintentionally create its own bottleneck. The sales department fills the top of the funnel, but operations cannot move franchisees through the system. The result is not growth. It is pressure.

This pressure can damage every stakeholder.

Franchisees become frustrated because they invested time and money but cannot get open. Candidates become skeptical when validation calls reveal delays. Lenders become cautious when they see weak operating history or inconsistent openings. State examiners may ask harder questions during registration review. Existing franchisees may wonder whether the franchisor is more focused on selling new agreements than supporting operating units. The franchisor’s own team becomes reactive, spending more time solving development problems than improving the system.

A pipeline should be a bridge to royalties. Too often, it becomes a parking lot.

The Capital Market Makes the Problem Harder

The SNO question has become more important because the path to opening a location is more expensive and more demanding than it was several years ago.

The Federal Reserve’s 2026 Small Business Credit Survey reported that rising costs of goods, services, and wages were the most common financial challenge for small businesses. The same report found that 60 percent of firms applied for financing in the twelve months before the survey, while only 42 percent of applicants received the full amount they sought. For franchisees trying to finance a buildout, equipment package, leasehold improvements, inventory, payroll, and working capital, that lending environment matters.

Interest rates also remain a factor. Federal Reserve H.15 data for June 2026 showed the bank prime loan rate at 6.75 percent. That is not a crisis by itself, but it changes the economics of a franchise investment. Debt service becomes heavier. Break even takes longer. Landlords may require stronger guarantees. Lenders may scrutinize projections more aggressively. Franchisees with marginal liquidity may be able to sign an agreement but not complete the journey to opening day.

Construction conditions add another layer. The U.S. Census Bureau reported April 2026 construction spending at a seasonally adjusted annual rate of $2.172 trillion, with private nonresidential construction at $729.8 billion. Those figures show the sheer size of the construction market, but for a franchisee they also point to a practical reality. Franchise buildouts compete for contractors, materials, permits, and municipal attention in a market where delays and cost pressure can quickly alter the investment equation.

For restaurant, retail, fitness, child service, health, beauty, and service based concepts with physical locations, the preopening timeline is not just administrative. It is capital intensive. A franchisee can be enthusiastic and still become stuck. A franchisor can have demand and still lack opening capacity. Item 20’s signed but not opened figure forces serious readers to examine the space between those two truths.

The Difference Between a Sales Organization and a Franchise Company

A franchisor that sells well has proven one thing. It can persuade people to buy.

A franchisor that opens well has proven something more valuable. It can help franchisees become operators.

That distinction is central to franchise value. Franchise fees may create short term cash, but royalties come from operating units. Brand equity comes from operating units. Validation comes from operating units. Market presence comes from operating units. Local customer awareness comes from operating units. Franchisee satisfaction comes from operating units.

A company with 10 open units and 50 sold may sound more exciting than a company with 25 open units and 10 in development. But a sophisticated buyer should not accept that comparison at face value. The second company may be healthier if its units are open, operating, validating, and producing royalties. The first may be promising, but it may also be unproven at the exact stage where franchise systems either mature or crack.

This is especially important for emerging brands. A new franchisor often needs franchise fee revenue to fund growth, but that creates a temptation to sell faster than the system can responsibly support. The more agreements the franchisor signs, the more obligations it creates. Each new franchisee expects training, real estate help, vendor guidance, marketing support, operating assistance, and leadership. If the franchisor has not priced, staffed, and planned for those obligations, every sale increases strain.

There is nothing wrong with ambition. Franchising requires ambition. But responsible franchise growth is not measured by how quickly agreements are signed. It is measured by how consistently franchisees open, operate, validate, and expand.

What a Strong Item 20 Story Looks Like

A strong Item 20 story does not require perfection. Every franchise system has delays. Every real estate driven business has locations that take longer than expected. Every franchisor will have franchisees who change plans, struggle with financing, or fail to execute. The issue is pattern.

A strong Item 20 story has several characteristics. The number of signed but not opened units is proportionate to the size and age of the system. The pipeline is young enough to be credible. The franchisor can explain the status of the pipeline with precision. The projected openings for the next fiscal year are supported by historical performance and current development milestones. The franchisor can show that franchisees are moving from agreement to opening within a reasonable timeline. The operating base is growing, not merely the promise of future openings.

Most importantly, the franchisor can demonstrate franchisee success after opening.

That is the point too often missed. The goal is not to empty the SNO column by rushing franchisees into weak openings. The goal is to create successful franchisees who open properly, operate consistently, and become proof that the model works outside the founder’s hands.

A franchisor should want Item 20 to tell a story of disciplined growth. New units open. Transfers are explainable. Terminations are not excessive. Closures are not hidden behind vague explanations. The pipeline is credible. The projections are reasonable. Current franchisees can validate the opportunity. Former franchisees can be discussed honestly. That is the kind of Item 20 that builds trust.

The Red Flags Hidden in a Large SNO Number

A large signed but not opened number is not automatically bad. It becomes concerning when paired with other signs.

One red flag is a low number of open units relative to agreements sold. If a brand has sold many more franchises than it has opened, candidates should ask whether the development model has been tested. Another is pipeline aging. If many agreements are more than a year old without sites, leases, financing, or construction activity, the franchisor should be prepared to explain why.

Another concern is a mismatch between the projected openings and the franchisor’s historical performance. If a franchisor opened two units last year but projects fifteen openings next year, the projection may be possible, but the explanation must be strong. What changed? Are leases signed? Is construction underway? Has the support team expanded? Are lenders committed? Are permits in process? Are franchisees trained?

A third warning sign is weak franchisee validation. If current franchisees express frustration over opening delays, cost overruns, site selection confusion, or poor communication, the SNO number becomes more than a disclosure statistic. It becomes evidence of a system issue.

A fourth warning sign is heavy dependence on franchise fee revenue. If the franchisor’s financials suggest that franchise fees are materially supporting the business while royalty revenue remains limited, the company may be relying on selling more agreements before enough units are open to sustain the support infrastructure. That can become dangerous. Franchisees need a franchisor that is financially capable of supporting them through the life of the relationship, not merely through the sales process.

The Questions Serious Candidates Should Ask

A serious franchise candidate should use Item 20 as a starting point, not an ending point.

The candidate should ask how many franchise agreements are currently signed but not opened, how old those agreements are, and what stage each location has reached. They should ask how many franchisees signed agreements in the last three years but never opened. They should ask whether any signed franchisees are inactive, delayed, in default, seeking refunds, or no longer pursuing development.

They should also ask about the average time from franchise agreement signing to opening. That timeline should be broken into practical stages, site identification, lease execution, financing, permitting, construction, training, and grand opening. A franchisor that knows these numbers is managing the system. A franchisor that cannot answer is probably managing by anecdote.

Candidates should speak not only with open franchisees, but also with franchisees who are signed and not yet open. Those conversations are often revealing. A not yet opened franchisee can tell a candidate whether the franchisor is organized, responsive, realistic, and helpful before opening. That is the moment when many franchisees need the most guidance.

The FTC’s amended Franchise Rule FAQs also make clear that franchisees with binding franchise agreements but not yet open can fall within Item 20 contact disclosure obligations. NASAA commentary further states that franchisees who signed and remain in the system but have not opened should be shown only in Table 5 and clearly identified as not yet opened in the franchisee contact list. That means candidates should not ignore those names. They should call them.

What Franchisors Should Do Before the Pipeline Becomes a Problem

The solution is not to stop selling. The solution is to sell with discipline and build the support system before the pipeline overwhelms the company.

Franchisors should manage SNO as an operating metric, not just a disclosure requirement. The internal dashboard should show each signed franchisee, agreement date, territory, site status, financing status, lease status, permitting status, construction status, training status, expected opening date, and risk level. It should also show the reason for any delay.

The franchisor should establish realistic opening timelines by concept type. A home based or mobile service model may open far faster than a restaurant or retail concept. A food service brand with grease traps, hoods, municipal approvals, and specialized equipment cannot responsibly use the same timeline as a low buildout service business. The development calendar must reflect operational reality, not sales pressure.

The franchisor should also tighten candidate qualification. Some candidates can afford the franchise fee but not the full opening process. Others have strong enthusiasm but weak liquidity. Some are attracted to the brand but not prepared for the complexity of real estate, hiring, and local marketing. Awarding a franchise to an undercapitalized candidate may produce a signed agreement, but it can also create a future Item 20 problem.

A stronger approach is to treat the franchise award as the beginning of a managed launch process. The franchisor should have clear milestones, deadlines, communication standards, and escalation points. If a franchisee misses key development milestones, the franchisor must act early. Silence allows weak pipeline numbers to age into reputational damage.

Why Franchisee Success Must Replace Franchise Sales as the Core Proof

The best franchisors do not use the development pipeline as the central proof of concept. They use franchisee success.

That is where the franchise model earns its credibility. A franchise system is not validated by how many people signed agreements. It is validated by how many franchisees opened, followed the system, served customers, generated revenue, controlled costs, renewed, expanded, and recommended the brand to others.

  • For candidates, that is the difference between buying into a sales story and buying into an operating system.
  •  For franchisors, it is the difference between growth and durability.
  • For lenders, it is the difference between a concept with demand and a concept with repayment capacity.
  • For investors, it is the difference between paper growth and royalty growth.
  • For franchisees, it is the difference between owning rights and owning a business.

The smartest franchise companies will increasingly measure themselves by opening conversion, average time to opening, opening cost accuracy, first year franchisee performance, validation strength, royalty growth, unit level economics, and franchisee retention. Those measures tell a deeper story than units in development. They show whether the franchisor can turn franchise sales into operating success.

The Forward Looking Reality

The franchise market will continue to reward concepts that can grow with discipline. Demand for franchise ownership remains meaningful, and the broader franchise economy remains substantial. But candidates, lenders, attorneys, state regulators, and investors are becoming more sophisticated. They are looking past the headline numbers.

A large SNO pipeline will still get attention. It should. It may signal strong demand. It may show that the concept has market appeal. It may indicate that the franchisor is building a meaningful footprint.

But from now on, the better question will be, “What percentage of that pipeline opens, how quickly, and how successfully?”

That question changes the conversation. It forces franchisors to examine whether they are building a real franchise company or merely a franchise sales machine. It pushes candidates to look beyond excitement and into evidence. It encourages lenders to evaluate execution risk. It gives investors a clearer view of future royalty quality.

Most of all, it restores the proper definition of growth.

Growth is not the number of agreements sold.

Growth is the number of franchisees who open well, operate well, and create enough success to make the next franchisee want to join for the right reasons.

Conclusion

Too many franchises sold and not yet open can become a quiet danger inside a franchise system. The number may look impressive in a sales presentation, but Item 20 demands a more disciplined reading. Franchise agreements signed but outlets not opened show that the franchisor can sell franchises. They do not prove that the franchisor can develop operators, open units, support franchisees, or create durable royalty growth.

For candidates, the SNO question should be central to due diligence. For franchisors, it should be central to leadership. For lenders and investors, it should be central to risk assessment.

The strongest franchise brands will not be the ones with the loudest development claims. They will be the ones that can show the full chain of proof, qualified franchisees, realistic sites, funded openings, disciplined launch support, operating performance, franchisee validation, and long term unit growth.

A sold franchise is only a promise.

An open, operating, successful franchisee is the proof.

© Copyright 2026 Gary Occhiogrosso – All Rights Reserved Worldwide

 

 

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This article was researched, outlined and edited with the support of A.I.

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