Franchising: analyse closures before expanding

Before turning an existing business into a franchise network, studying your best-performing outlet is not enough. A closed site, a difficult relocation or an operation that changed hands can also reveal weaknesses in your plans. Analysing these events helps you understand which problems can be fixed and which mean expansion should be put on hold. The aim is not to find someone to blame, but to avoid passing unresolved difficulties on to franchisees.

1. Reconstruct events without confusing the causes

Start with the sites you have operated directly, including those no longer trading. If you have already established a small franchise network, include franchisees’ experiences too, but keep the two groups separate: responsibilities, investment and operating conditions may differ.

Do not classify everything as a ‘closure’. A shop that moves to the next street is not the same as a business that ceases trading because it has run out of cash. Likewise, a change of ownership does not necessarily mean an outlet has stopped operating.

Prepare a record for each event, noting:

• the site, its opening date and the date of the event;
• the type of event: closure, relocation, sale or change of management;
• the stated reason and supporting documents;
• previous financial performance, where available;
• exceptional costs, operational disruption and measures attempted.

Always separate facts from interpretations. ‘The rent increased’ is a verifiable fact; ‘the location did not work’ is a hypothesis that needs further investigation. Keep both pieces of information, but do not give them equal weight.

If you have only one site and have not experienced any closures, do not manufacture comparisons. You can examine temporary suspensions of trading, reduced opening hours or abandoned expansion plans, while making clear that these were not closures.

2. Look for weaknesses in the model, not a convenient explanation

A closure may result from several factors acting together. Expensive premises may remain viable with strong productivity, but become problematic when combined with understaffing, excess stock or underestimated seasonal fluctuations in demand.

Examine each case at three levels. The first is the local context: accessibility, changes in the area and the customer profile. The second is site management: staff rotas, available funding and the owner’s ongoing involvement. The third is the model offered by the franchisor: the complexity of operational processes, the product range, tools or reliance on skills that are difficult to find.

Then compare the case with a site that has remained open under similar conditions. Look beyond turnover: consider margins, staffing costs, rent, stock requirements and the time needed for the business to settle into stable trading.

For example, if one site works only because the founder is there every day, while another struggles with an employed manager, the problem may not be the individual. The business may lack the organisational structure needed to support routine management. Test that possibility before offering the model to franchisees.

3. Turn the analysis into decisions you can test

A list of problems will not improve your plans. For each weakness identified, define a corrective action, assign someone to take responsibility and establish a test to assess its effect.

If stock has tied up too much cash, trial a smaller initial product range at a company-operated site. If operations require scarce skills, simplify the processes and see whether a typical team can handle them. If difficulties arise only in quieter months, assess the corrective action during that period too: a few positive weeks are not enough to establish whether a seasonal problem has been resolved.

Use three possible outcomes:

• Proceed, when the cause is understood and the corrective action has delivered consistent evidence of improvement.
• Proceed with limits, temporarily excluding conditions that have not yet been validated.
• Postpone, when doubts remain about viability or the ability to replicate the result.

These outcomes are management tools, not certifications. Record them alongside the evidence and outstanding questions, so that the urgency of signing a new franchisee does not take the place of proper testing.

4. Keep internal analysis separate from disclosure obligations

In Italy, franchising is governed by Law No. 129 of 6 May 2004. Article 4 requires the franchisor to provide the prospective franchisee with a complete copy of the contract, together with the attachments required by law, at least thirty days before signing.

These include a list of operating franchisees and company-operated outlets, as well as details of the annual change in the number of franchisees and their locations over the previous three years. If the business has been operating for less than three years, the relevant period runs from its launch.

Closure analysis does not replace these documents. It does, however, provide an organised basis for avoiding inconsistent figures and imprecise answers. Do not present the net change in franchisee numbers as though it alone describes everything that has happened across the network. Ask your legal adviser to check that the required information is presented correctly.

Practical tip: before signing your next franchisee, choose one critical event, reconstruct it using documentary evidence and assign a corrective action whose effect can be tested. If you cannot yet explain what happened, do not consider that risk resolved.