Franchising: checking how the business model has been tested

A recognisable brand and a convincing business plan do not, on their own, prove that a business model has been tested in the market. Before joining a franchise network, a prospective franchisee should understand where, how and under what conditions the franchisor has tested the proposed model. The aim is not to secure a promise of success, but to distinguish documented operational experience from a concept that has yet to be validated.

What Italian law requires

Italian Law No. 129 of 6 May 2004, entitled “Rules governing commercial franchising”, states in Article 3(2) that, to establish a franchise network, the franchisor must have tested its business model in the market.

This is an important requirement, but it must be interpreted correctly: the provision neither sets a minimum testing period of one year nor expressly requires a specific pilot outlet. Trade association standards, professional practice and legislative proposals should therefore not be confused with the law currently in force.

Nor does market testing amount to official certification of profitability. It demonstrates a necessary step in developing the model, but does not guarantee that every subsequent outlet will achieve the same results.

Article 6 requires loyalty, fairness and good faith in negotiations. Prospective franchisees may request information that is necessary or useful in assessing the relationship. If the franchisor withholds information, it must explain its reasons, based on objective confidentiality grounds or third-party rights. This does not grant unlimited access to every internal document, but it makes precise, relevant requests important.

Establishing how the model was tested

Ask the franchisor for a written account of the testing process. Do not settle for “we have been operating for many years”: the company's overall experience may differ from its experience with the model you are buying into.

The essential questions are:

• Where was the model tested? Ask for locations, opening dates and the types of operation involved.
• Who ran the businesses? Distinguish between company-run operations, those managed by third parties and any previous franchising experience.
• Which version was tested? Establish the product range, services, premises size and sales methods used.
• How long was it monitored? Check whether the experience covers seasonal variations and normal trading periods, rather than just the launch.
• What changed after testing? Ask what problems emerged and what adjustments were made.

For supporting evidence, you can request operational reports, financial statements or summaries relating to the businesses tested, opening records and visits by arrangement. Aggregated or anonymised data may allow some checks without disclosing unnecessary personal or commercial information.

No single document proves everything: an opening date establishes that a business existed, but does not explain how the model worked. Look for consistency between the timeline, the explanations and the available data.

Checking whether the experience applies to your planned outlet

A model may genuinely have been tested yet still offer little basis for comparison with the proposal being offered to you. The question is not simply whether it worked, but with what resources and under what conditions.

A business run personally by its founder may benefit from expertise, relationships or daily involvement that are difficult to replicate. Owner-occupied premises do not involve the same outlay as rented premises. An outlet near head office may receive informal support that a more distant franchisee would not have.

Prepare a table with three columns: “conditions tested”, “conditions proposed” and “differences to clarify”. Focus particularly on:

• the size, location and characteristics of the outlet;
• staffing levels and work carried out directly by the owner;
• sales channels and the mix of products and services;
• support received from head office;
• costs incurred by franchisees but absent from company-run operations.

On this last point, ask your accountant to check whether the results presented include costs equivalent to those you will incur. A company-run business may not record a franchise fee or account separately for all the services provided by head office.

If the proposed business differs substantially from the tested model, ask what specific checks have already been carried out. Do not automatically treat a new version as identical to the one tested.

Using the answers to decide before signing

Keep requests, replies and documents in a dated file. If inconsistencies emerge, ask for written clarification: a sales presentation corrected only verbally remains a fragile basis for a decision.

Issues worth investigating include the absence of a verifiable timeline, confusion between the age of the brand and the testing of the model, or results that depend on exceptional conditions unavailable to franchisees. These do not, on their own, prove unlawful conduct, but they justify pausing your assessment.

Ask a lawyer to examine the implications if testing has not taken place or has been inadequately described. Do not assume that every shortcoming automatically gives rise to the same contractual remedy.

In practice: before signing, you should be able to explain on one page which model was tested, what evidence supports it and how it differs from the outlet you plan to open. If you cannot, you need further clarification before investing.