Buying a franchise: how to assess closures across the network

A franchise network can announce new openings while also losing outlets or franchisees. Before buying, it is worth piecing together both sides of the picture. The aim is not to rule out a brand because one of its businesses has closed, but to understand what happened, whether the causes still apply and how they could affect your future outlet.

1. Ask for the information on departures required by law

Spain has specific franchise legislation: Article 62 of Law 7/1996 on the Regulation of Retail Trade, and Royal Decree 201/2010. The latter requires written pre-contractual information that is accurate and not misleading to be provided at least twenty working days before you sign a contract or preliminary agreement, or make any payment to the franchisor.

Article 3(f) of the royal decree is particularly important when assessing the network’s stability. The information must include the structure and size of the network in Spain, its established outlets, the split between company-owned and franchised outlets, and the towns or cities where they are located. It must also state how many franchisees have left the network in Spain during the past two years, and whether they left because their contracts expired or ended for other reasons.

A franchisee’s departure does not necessarily mean an outlet has closed. The outlet may continue under a new owner or become company-operated. The legally required information is therefore a starting point, not a complete explanation of every change.

Do not treat an old registration number from Spain’s Register of Franchisors as a guarantee of stability: the national obligation to report information to that register has been abolished. Nor should you confuse membership of an association with certification of financial viability.

2. Establish what happened to each outlet

Request a list organised by outlet, showing dates and current status. To broaden your analysis, you can ask for a history covering more than the statutory minimum period, making clear that this is an additional request.

A simple spreadsheet should distinguish between:

• Actual opening: a new outlet that starts trading, not a territory reservation or a signed agreement awaiting premises.
• Permanent closure: an outlet that ceases trading, with the date it closed.
• Relocation: a change of address for the same business, which should not automatically be counted as growth.
• Change of ownership: an outlet that continues trading under another franchisee.
• Conversion to company operation: an outlet taken over and operated by the franchisor.
• Departure from the brand: a business that remains open but is no longer part of the network.

Cross-check this list against the current outlet directory and ask for explanations of any differences. An online listing may be out of date; do not treat it alone as proof of closure.

You do not need access to personal data or confidential files to identify patterns. You can request aggregated or anonymised explanations covering how long outlets had been trading, their formats and the reasons for departures.

3. Interpret changes without jumping to conclusions

Net growth can conceal turnover within the network. Having more outlets today than a year ago does not tell you how many opened, closed or changed hands during that period.

Group outlets by their year of opening and look at how long they had been trading when they left the network. Early departures call for different questions from those arising at the end of long-term contracts. Also check whether problems are concentrated in a particular format, type of location or phase of expansion.

Avoid calculating a supposed failure rate by mixing franchisees with outlets: one person or company may operate several outlets. Likewise, do not compare periods of different lengths or actual openings with announced projects.

Explanations should be specific. ‘Personal reasons’ may be genuine, but on its own it does not explain a series of departures. Ask whether there were operational difficulties, contractual disagreements, disappointing financial results or restructuring decisions. No single reason proves that the model is unviable, but repeated occurrences call for closer scrutiny.

4. Turn your findings into decision criteria

Relate the patterns you identify to the outlet you want to open. If departures are concentrated in premises similar to yours, ask what changes have been introduced and what evidence shows they are working. If the franchisor took outlets back under its own management, ask whether this was a temporary solution or a lasting change to the operating model.

Prepare a written list of discrepancies and request answers before committing any money. Keep dated versions of the documents and any clarifications you receive. Any additional guarantees or specific commitments that are crucial to your decision should be reviewed with legal advice and, where appropriate, incorporated into the contract.

The absence of a complete explanation does not, in itself, prove a breach of obligations, but it may justify postponing your decision.

Practical takeaway: before buying, insist on a clear distinction between openings, closures and franchisee departures. Base your decision on the consistency of the track record and the answers you receive, not simply on the number of new openings.