Franchising in Canada: assessing closures across the network

A franchise network may announce new openings while losing outlets elsewhere. Before buying a franchise in Canada, examining these changes helps you answer an essential question: do outlets stay in business over the long term, and under what circumstances do their owners leave? The aim is not to demand a flawless track record, but to understand what departures reveal about the business model you are considering.

1. Trace changes, rather than simply counting outlets

The current number of outlets provides a snapshot, not a history. A network that remains the same size may have experienced several closures offset by an equal number of openings. Conversely, a decline may reflect planned consolidation rather than widespread difficulties.

Ask the franchisor for a history covering several financial years, clearly distinguishing between:

• new openings;
• permanent and temporary closures;
• outlets resold to other franchisees;
• outlets taken over by the franchisor;
• relocations and changes of brand.

Create a table recording, for each location, the opening date, the date of closure or ownership change, the type of change and the reason given. Include one column for available supporting evidence and another for points that still need clarification.

A resale is not necessarily a failure, and an outlet that remains open is not necessarily a stable business. Repeated changes of ownership at the same location particularly warrant an explanation. Also check whether the figures presented cover Canada alone or include overseas markets where conditions differ.

2. Understand the causes and check the explanations

Ask for a specific explanation for each significant closure or transfer. Retirement, illness, an expiring lease and a loss-making business tell different stories. A phrase such as ‘personal reasons’ may be accurate, but it does not, on its own, rule out commercial difficulties.

Cross-check explanations with former operators where their contact details are available, and against dated information in the public domain. An online business listing or social media post provides a clue, not sufficient proof of why an outlet closed.

Ask targeted questions: how long did the outlet operate? Was an attempt made to sell it before it closed? Did the franchisor offer to step in? What changes were subsequently made to the business model?

Where an outlet was taken over by the franchisor, establish whether this was a strategic acquisition, a temporary transition or a support measure. Continued trading under the same brand may conceal a significant change in operating arrangements.

Respect confidentiality limits, however. The franchisor will not always be able to disclose the financial terms of a private transaction. In that case, ask for an anonymised explanation and clearly identify anything that remains unverifiable.

3. Use the provincial framework to obtain information

In Canada, franchise-specific obligations vary by province. Have the rules applicable to your purchase checked, rather than assuming that documents used elsewhere meet local requirements.

In Alberta, the Franchises Act and its regulation govern pre-contractual disclosure. Subject to applicable exemptions, the franchisor must provide the disclosure document at least 14 days before an agreement relating to the franchise is signed or any franchise-related payment is made, whichever occurs first. Among other things, the document must contain all material facts relating to the franchise.

The Alberta government’s guide expressly recommends that buyers establish how many franchises there are and check whether any have closed or changed ownership, when and why. This provides an excellent starting point for your analysis, without implying that every detail requested must automatically be disclosed in every situation.

In Quebec, there is no franchise-specific legislation: the general provisions of the Civil Code of Québec, particularly those relating to good faith and consent, apply. The absence of a disclosure document required by specific legislation does not remove the need for thorough due diligence.

If significant departures appear to be missing from the information you have received, pass your findings to your lawyer before signing. They can assess the legal implications.

4. Relate departures to your own plans

Focus on outlets comparable to the one you plan to operate: the same format, a similar length of time in business, customer profile and market characteristics. A closure in a shopping centre does not necessarily have the same implications as the closure of a standalone outlet.

Avoid calculating a ‘failure rate’ from incomplete data. Separating closures from transfers and specifying the period covered produces a more useful analysis than a striking percentage.

Then work with your accountant to assess whether recurring causes could affect you. If several operators mention an excessively high cost base, ask what has changed and what evidence supports that answer.

Key takeaway: before buying, obtain a history of changes across the network, verify the causes and record any uncertainties. A documented explanation is worth more than a simple tally of openings.