When you think of buying a franchise business, the first image that might come to mind is buying your local IGA, Domino’s or coffee shop. However, buying an existing franchise store or location is only one method of joining a franchise network. Periodically, you may have the opportunity to buy a new franchise territory or store location, known as a “greenfield” franchise site. This article will outline the reasons why you should carefully weigh up the risks and rewards before buying a greenfield franchise site.
What is a Greenfield Franchise?
In a retail franchise, a greenfield franchise is essentially a new store location where a business has not yet opened. It exists as an opportunity for you to purchase the business directly from the franchisor, move in, set up and begin to run the business.
In a services based franchise such as a lawn mowing business, a greenfield franchise is essentially a new franchise territory which is not being serviced by any existing franchisee.
This opportunity will often look like the following:
- a franchise location is listed on the franchisor’s business website;
- physical premises have been found by the franchisor which are ready for business operations to commence; or
- no store location has yet been secured. The responsibility to find a commercial premises to lease within the identified territory may either fall on you or the franchisor.
In any case, the business will not be in operation and you will be in the position of starting the business afresh.
You will generally notice a greenfield franchise listed on the franchisor’s website in its directory of existing franchise locations. The label of a “greenfield” location is used to distinguish it from existing franchise locations.
1. Risks and Rewards
A key factor in determining a business’ success is its location and the relevance of the brand to local customers. A greenfield franchise may have a lot of potential, however your territory will be untested. Accordingly, it’s important to weigh up the associated risks and rewards.
Once you obtain the disclosure document from the franchisor, it’s a good idea to call as many existing franchisees as possible to confirm whether the greenfield system has a successful track record. If other greenfield franchisees are struggling, this may be a sign the franchise system is not for you.
Also, check whether there are any other businesses in the local area which are offering similar products or services. You may want to do some initial research into whether the franchise business provides either:
- a missing offering to the area; or
- similar products or services but does it better.
Often there will be another business in the area which is selling similar products or services. If you are a local in the area, and familiar with the area, you may want to weigh up:
- how long has that business been in operation; and
- how well has it been going?
2. Financial Due Diligence
One of the considerations when buying a franchise is whether it has a proven track record of success. You can evaluate a franchise’s business performance in two ways:
- the established reputation and profitability of the franchise brand in general; and
- the potential profitability of the franchise in a given location.
The Franchise Code of Conduct imposes strict obligations on a franchisor to give financial disclosure upfront. This means that, where a franchisor has been operating for more than two financial years, they must provide a copy of either:
- their financial reports for the last two financial years; or
- an independent audit report provided by a registered company auditor.
However, there is greater uncertainty when you are buying a greenfield franchise site because you cannot access information about earnings for that particular franchise business in the given location.
In this situation, you may need to base your decisions on any forecasts or projections given by the franchisor.
3. Review of Legal Issues
Compared to the risk involved with purchasing an existing franchise, it’s clear that there will be greater uncertainty about the potential performance of the new franchise. Given this prospect, it becomes even more important to be mindful of the legalities involved before you sign any documents.
The Franchise Code of Conduct states that two documents must be provided to a prospective franchisee:
These documents are complex so it is a good idea to engaging a franchise lawyer to review them. This professional advice is the best safeguard to ensure you do not miss any potential problem areas which may require further enquiries or negotiations with the franchisor.
An experienced franchise lawyer will have reviewed a diverse range of franchise agreements from a variety of business models. They are best placed to advise you about the key risks of buying a greenfield franchise.
You have a minimum of 14 days from the date you receive legal documents before you can be compelled to sign them.
Buying a greenfield franchise site can be a very exciting opportunity. However, there are risks to investing in an untested territory. There is only so much you can do to investigate the potential profitability of a greenfield franchise site. Before you sign any documents, engage a franchise lawyer to review the legal risks to help you make an informed decision.
If you have any questions about purchasing a new franchise, get in touch with LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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