Buying a Franchise - Step five

Step five of our series on buying a franchise is looking at whether an established franchise location or a new franchise location is best for you.

If you’re happy with what the existing franchisees have told you, then you might have a decision to make as to whether you choose to buy an existing store or start a new store in a ‘Greenfield’ location.

Let’s assume for a moment that you’re the type of person who can tolerate a reasonable level of risk and as such, you’re prepared to venture into a new ‘Greenfield’ franchise where the franchisor has not operated from a location in the area or within the territory. What should you look for, what are the questions to ask and how do you arrive at a commercially sound decision?

Some of the benefits of taking on a new ‘Greenfield’ franchise include:

  • No goodwill is payable to a previous franchisee
  • It is a brand new operation and the local reputation of the business can be established as desired
  • If it is a site based franchise, the landlord may be prepared to make a contribution toward fit out and/or negotiate the lease terms to link rental to sales levels.

Obviously, the balancing factor is that you will not have the certainty of a proven trading history for that particular location.

As an alternative to a ‘Greenfield’ franchise, an established business enables you to take some comfort in the proven trading history so, in effect, it is generally perceived as a lower risk option.

However, you may have to deal with the history of the previous franchisee. If the premises or vehicles are looking a little tired, a refurbishment or upgrade can restore the appearance. Don’t forget the current franchisee’s reputation in the market – which could be good or bad. Similarly, existing employees could be a positive or a negative influence.

A key issue to consider is the potential for further growth of the business; is there more growth to be had or has it reached its peak?

There is no substitute in business for having detailed and accurate historical financial information for the performance of a business. The quality of the numbers is crucial and frankly, some examples defy belief – they lack detail and in some cases, any semblance of accuracy.

Thus you need to look carefully when considering between a ‘Greenfield’ and an existing location. Once you've looked into this, you should be looking at the next steps in the buying a franchise process.

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