Franchising: how to assess whether a brand’s business model has been tested

Buying a franchise means choosing a business model that should already have been put to the test. But a busy shop alone does not prove that a new franchisee can achieve comparable results. Before choosing a brand, you need to understand what has been tested, under what conditions, and how relevant that experience is to your own business.

What Italian law requires

Law No. 129 of 6 May 2004, which governs franchising in Italy, states in Article 3(2) that a franchisor must have tested its business model in the market before establishing a franchise network.

This is an important distinction: developing a brand, designing a shop fit-out or preparing a sales presentation is not enough. The model must actually have been tested in the market.

The law does not set a minimum testing period of one year. Observing at least one annual cycle can help assess seasonality, but this should not be presented as a legally required period. Nor does the passage of time alone demonstrate that the model is sound.

Article 6 requires the franchisor to act honestly, fairly and in good faith, and to provide promptly any information the prospective franchisee considers necessary or useful in relation to the contract, subject to objective confidentiality requirements. Any refusal to provide requested information must be explained. This gives you a practical basis for asking specific questions about testing, without assuming unrestricted access to all company data.

Establish what has actually been tested

Ask the brand to explain how its business model has developed: when trading began, where it was tested, who ran the pilot outlets and what changes were introduced. The aim is not to collect as much material as possible, but to establish a verifiable track record.

Useful questions include:

• Which outlets or businesses were used to test the model?
• Were they run directly by the franchisor or by other operators?
• How long did they operate using the model now being offered?
• What changes were made to products, services, prices and sales methods?
• What problems arose, and what was done to address them?

Always distinguish between how long the brand has existed and how much experience it has with its current model. A company may have been trading for many years but have only recently introduced a different model in terms of premises size, customer base or service delivery.

If you are being offered a small neighbourhood outlet, experience gained from a large destination store may provide useful insights, but it does not automatically amount to equivalent evidence. Ask which elements have already been tested and which would be new and would need to be tried out in your outlet.

Understand whether the results are transferable

A pilot outlet may benefit from conditions that are difficult to reproduce: company-owned premises, an exceptional location, the founder’s daily presence or particularly favourable trading terms. These advantages do not make the results irrelevant, but they do mean you need to examine them critically.

With your accountant, compare the tested model with the one being offered to you. Focus in particular on four areas:

• Local demand: who buys, what need they are meeting and how often they buy.
• Day-to-day operations: how many people are needed and what skills they must have.
• Financial conditions: which costs the pilot outlet bears and which costs you would face as a franchisee.
• Dependence on the founder: which sales or business relationships depend on the founder’s personal reputation.

For example, the results of a founder-run business that records no remuneration for the founder’s work are not directly comparable with those of a franchisee who must pay a manager. You also need to account for the contractual fees payable by a franchisee, even if they do not appear in the accounts of a company-operated outlet.

Ask for data covering a period of time, rather than just the best month or an overall turnover figure. Launch promotions, exceptional events and seasonal peaks can distort your understanding of normal demand. The purpose is to check whether the conditions are comparable, not to treat past performance as a guarantee of profit.

Decide when to investigate further and when to walk away

A visit to the pilot outlet is useful if it gives you an opportunity to observe real work. Look at customer flows, service times, less visible tasks and managers’ involvement. If possible, compare different times: a staged demonstration is not the same as routine operations.

Vague answers about the timeline, results with no specified reporting period and an inability to distinguish the tested model from the one being offered all warrant further investigation. Openness about limitations matters too: a young brand is not automatically unreliable, but you need to assess it with a clear understanding of the experience available.

Before making any commitments, prepare a summary with three columns: what has been demonstrated, differences compared with your proposed outlet, unresolved questions. Have your advisers review it and request written clarification on the key points.

In practice: choose a brand only when you can explain not just where its model has worked, but also why it could work under the specific conditions of your own business.