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Sunday, April 18, 2021
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Should I purchase a greenfield or an existing franchise?

One of the first considerations for the franchisee entrepreneur is whether they should purchase an existing franchised business or a greenfield/start up franchise?

There is of course no universally correct answer and it depends on the individual buyer, their appetite for risk and their business ownership objectives.

The traditional paradigm has been relatively easy to understand.

The arguments for buying an existing franchise business

An existing franchised business has performance history. A potential purchaser can look at and analyse the performance and make some relatively sound projections around their likely performance moving forward.

Where the franchise component is so important is that a potential franchisee, as part of that analysis, can look at the particular business unit or franchise and evaluate it against others in the system, or the benchmarks – is it performing well due to the franchisee or location? Could they do a similar or better job?

This can also help with funding as history can be referred to. For many, they consider it a safer purchase option.

Even an underperforming franchise can and often is the preference as the price may be less than replacement or establishment costs and may also allow an incoming franchisee entrepreneur to quickly and relatively easily increase goodwill and generate a capital return.

The potential downside for buying an existing franchise business is, of course, how much is the incoming purchaser paying for goodwill?

A more difficult evaluation is how much of that goodwill can be attributed to the particular franchisee versus the brand, and if and by how much this may be eroded.

The arguments for buying a greenfields/start-up franchise business

The ability to generate goodwill versus purchasing it is usually the major driver for establishing a greenfield franchise business.

Usually this means that a start-up is less expensive to purchase than an existing one – particularly a profitable franchise business.

Not surprisingly, the franchisee entrepreneur that is more confident in their abilities and or has a higher risk appetite is likely to lean this way.

The downside of establishing a greenfields business are of course the unknowns – how long will it take to get to breakeven and beyond, what is the magnitude of the opportunity or business?

A less confident franchisee entrepreneur may also be concerned around their ability to build and grow versus maintain a business.

Challenging the traditional paradigm

In the current environment, you are unlikely to be surprised that an overwhelming number of new franchisee entrepreneurs are focused on purchasing an existing franchise business.

Subscribing to the traditional paradigm they are seeking to see history and proven performance, in particular how the businesses have performed over the past six to 12 months.

The ability to generate goodwill versus purchasing it is usually the major driver for establishing a greenfield franchise business.

It could be considered risk-averse behaviour, but I would suggest that there are several new factors that need to be taken into consideration and perhaps challenge the traditional paradigm.

For example, has the disruption of the past year finished?

The old cliché that past performance is the best indicator we have for the future may no longer apply.

Disruption to some sectors like inbound travel is obvious and acute, but what about businesses that have traded well or even up over the past six-to-12 months – are they still to have their disruption?

Or what about those franchise businesses in either a category of location that have been impacted: will and when will they trend upwards?

How about completely new business concepts where there are no existing businesses for resale?

I do believe that there will be ongoing changes to consumer behaviour, how and where money is spent, category changes, new trends and whole new franchise business opportunities.

These will be both geographically in markets where there may not be existing franchise units and or in completely new markets for new products, services and systems.

So, to answer the question of “Should I purchase a greenfield or an existing franchise business?” the traditional paradigm remains, but it can certainly be viewed through some new lenses.

Nathan Bonney
Director of Iridium Partners. He can be reached at nathan@iridium.net.nz or 0275-393-022

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