Greenfield Franchises – Opportunity or Risk?

Being offered a Greenfield franchise site can sound very exciting. You are getting in at the beginning; there is no previous owner, no old reputation to deal with, and, in many cases, you may be gaining access to a new territory where that franchise brand has never operated before.

For some franchise systems, a Greenfield site simply means opening another store in a suburb where the brand is already known. For others, it may mean taking the franchise into a completely new city or region. In some cases, you may even be helping establish a relatively new concept. That can be a great opportunity, but it also carries a high risk of a new business, often based on a proven formula but with unknown demographics and taste for your franchise.

Will a Greenfield site work?

Nobody really knows whether it will work. When you buy an existing franchise, you can look at actual sales, wages, rent, margins, and customer numbers. With a Greenfield site, most of what you are relying on is based on projections and assumptions.

The franchisor will usually provide plenty of information. They will give you demographic reports, traffic counts, information from other franchise locations, estimated customer numbers, expected gross margins and projected turnover.

All of that can be useful. But projections are still projections. Just remember, statistics can lie or be bent to make things look better than they are. So many years ago, in a former life, an associate of mine became involved in establishing a car wash at a major Westfield shopping centre. In this example it was predicted that around 20,000 cars passed through the area each day. On paper, it looked fantastic. We only needed a very small percentage of those cars to use the car wash for the business to work. In theory, getting 20 customers from 20,000 passing cars sounded easy. In reality, even getting those 20 customers could be difficult.

That experience has always stayed with me because it highlights one of the biggest traps when assessing a Greenfield business. Statistics can look impressive, but statistics do not automatically become paying customers. The same applies to foot traffic in a shopping centre. The centre may attract thousands of people each day, but what really matters is how many of those people are likely to stop, buy and return. A franchisor may tell you that the surrounding population is growing strongly, that there are thousands of households within a certain radius or that the centre attracts millions of visitors each year.

Do your homework!

That may all be true. But the real question is how many customers your business needs each day to break even and whether that number is actually realistic.  At Gartly Advisory, we help in the due diligence process if you are considering buying a franchise.

If a franchisor is projecting $1 million or $1.2 million of annual sales, then let’s understand exactly where that figure came from. Is it based on another store? If so, is that store genuinely comparable? Review the assumptions carefully. Are the statistics based on a similar type of shopping centre? Does it pay the same rent? Does it have similar competition? Is the brand already well established there? Does it have better parking, better visibility or a stronger customer base? The successful store that is presented to you may show what is possible. It does not necessarily show what could go wrong.

What research has been done?

Large franchise businesses such as McDonald’s have spent decades developing systems around site selection. They study traffic flows, demographics, visibility, accessibility, competition and customer behaviour before deciding where to open.

Not every franchise system has that depth of experience. Some are still working out where their concept performs best, and sometimes the franchisee is effectively the person funding that experiment.

So if the site works, everyone wins. The franchisor gets another location, the brand expands, and the franchisee hopefully builds a profitable business. If the site does not work, however, it is usually the franchisee who carries most of the financial pain. You have the lease, the staff, the fit-out, the equipment finance, the rent and the losses. The franchisor may have lost a location, but you may have lost a substantial amount of your own money. That is a very different level of risk.

How long will it take?

The big question is how quickly sales are expected to develop for the Greenfield site?. For a Greenfield business, sales will take time to grow. Customers will need to find you. They need to try you. Then they will come back. You and your staff need to learn the business, and mistakes will be made, and the operation needs time to settle down.  I often see forecasts that seem to assume the business will open and begin trading at a mature level very quickly. Sometimes that happens. The first three months post-opening may be slow. Then the next six months may slowly pick up, but don’t expect miracles. It may take 12 to 18 months for the business to reach the level everyone originally forecast.

The Danger is cash flow!

The biggest danger is not necessarily whether the business eventually becomes profitable and whether you have planned cash flow until it reaches this point. We have seen many a time in small business where money runs out before the business takes off.  lot of time calculating the franchise fee, fit-out, equipment, stock and legal costs, but often underestimate how much cash is required once the doors actually open. Rent continues, wages and overheads start from day one. You need a wage. If the business is losing $10,000 or $15,000 a month while sales build, how long can you carry that?

Don’t just speak to the best operator in the franchise network. Of course, that person will have a good story. Speak to other businesses who opened Greenfield sites and are in existence. Another important issue arises when the franchise brand itself is new to the area: how will it be accepted?

Tread carefully with a Greenfield site

A Greenfield franchise opportunity should never be assessed with a single set of financial projections. Should you be testing the numbers yourself with different scenarios and downgrade forecasts? Understand your breakeven point and, more importantly, how much cash you will need to survive those scenarios. But Greenfield also means unproven, and this always needs to be considered in any business decision. When you buy an existing franchise, you can at least look backwards and see what has actually happened.

With a Greenfield site, you are investing in what everybody hopes will happen next. Sometimes those expectations are right. But sometimes they are not.