Franchising: assessing network openings and closures

A brand announces new openings: an encouraging sign, but not enough on its own to decide whether to become a franchisee. Before joining a franchise network, you also need to understand how many businesses leave it, how long they operate and why they change hands. Looking at these movements together helps distinguish sustainable growth from a constant turnover of business owners, without automatically treating every closure as a negative verdict.

1. Start with the information required under Italian law

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 4 requires the franchisor to give the prospective franchisee a complete copy of the contract to be signed, together with the required attachments, at least thirty days before signing, subject to the specific confidentiality exceptions set out in the law.

Two attachments are particularly important when assessing how the network has developed: a list of current franchisees and the franchisor’s company-owned outlets; and a year-by-year breakdown of changes in the number and location of franchisees over the past three years. If the business has been operating for less than three years, the period runs from its launch.

These figures are a starting point, not a full account of why franchisees leave. Changes in franchisee numbers alone do not explain how many have closed permanently, sold their business or continued trading without the brand.

Ask for an additional breakdown that distinguishes between these events. Frame this as a request for clarification to support your decision, rather than confusing the level of detail you would like with what the law expressly requires the franchisor to attach.

2. Track the movements, not just the net change

A network may have more franchisees than it did the previous year while also having lost numerous business owners during that period. A positive net change conceals this turnover if the underlying figures are not provided.

Prepare an annual table covering at least the following:

• franchisees at the start and end of the period;
• new franchisees joining the network;
• franchisees leaving the network;
• outlet openings and closures;
• changes of operator;
• conversions between company-owned and franchised operations.

Franchisees and outlets are not necessarily the same unit of measurement: one business owner may operate several locations. A sale can change the owner without interrupting the shop’s trading; a conversion to a company-owned outlet can retain the brand while reducing the number of franchisees.

Ask for each breakdown to state when it was last updated, the geographical area covered and the counting method used. If the sales presentation refers to “locations”, check whether this includes trading outlets, premises being fitted out or simply signed agreements. Comparing unlike measures can produce misleading conclusions even when the individual figures are correct.

3. Look for the causes and compare genuinely similar businesses

A closure may result from the owner’s retirement, the loss of premises, management problems or poor financial performance. These are different circumstances, with different implications for someone considering an investment.

For each significant departure, ask when the business opened, when the franchise relationship ended and what explanation is available. You do not need personal details about the former franchisee: what matters is the outlet’s operating history and any recurring problems.

Then focus your analysis on outlets comparable to your proposed business in terms of size, business format, local market and length of operation. A long-established shop in a major city centre tells you little about the viability of a new outlet in a small town.

It is useful to group openings by year and see how many are still trading at the same point after launch. This avoids treating newly opened outlets as equivalent to businesses that have been through several trading cycles. Also check whether continuity means only that the brand remains in place or that the same business owner is still operating the outlet.

There is no universal closure rate that automatically makes a brand reliable or unreliable. What matters most is the combination of frequency, timing, causes and similarity to the business you intend to establish.

4. Turn your analysis into a documented decision

Before signing, summarise the trends you have identified and the outstanding questions on one page. For each concern, ask for a specific response: what happened, what measures were introduced and what evidence is available to assess their effectiveness.

If many comparable outlets left the network shortly after opening, do not settle for the generic explanation that “the franchisees did not follow the model”. Ask which problems kept recurring and how candidate selection, initial support or opening criteria have changed.

Have the adviser helping you assess the investment review the breakdowns and responses. Contradictory figures or constantly shifting definitions warrant further checks before you make any commitments. The absence of a convincing explanation does not, by itself, prove any unlawful conduct, but it leaves a risk to take into account.

Practical tip: choose a brand only after establishing not just how many outlets it opens, but how many remain operational, who runs them and why the others leave the network.