Initial franchise stock: what to assess before buying

Initial stock may seem like just another line in the investment needed to buy a franchise. But a poorly chosen product mix can turn available cash into unsold goods before the outlet has even attracted customers. In franchising, brand standards help organise operations, but they are no substitute for analysing local demand. Before making this commitment, check what you will be buying, why each item is included and who bears any losses.

1. Start with the legally required disclosures

In Brazil, Article 2, item VIII of Law No. 13,966/2019, the Franchise Law, requires the Franchise Disclosure Document (Circular de Oferta de Franquia, or COF) to state the estimated cost of initial stock and its payment terms. This information forms part of the breakdown of the investment needed to acquire, set up and launch the franchise.

The COF must be provided at least ten days before you sign the franchise agreement or preliminary agreement, or pay any fee to the franchisor or an associated person or company. This is a minimum advance disclosure period, not a deadline for completing your assessment.

Disclosing an estimated cost does not guarantee that the stock will sell. Nor does it amount to a commitment to buy back any remaining products. Disclosure obligations and commercial responsibilities need to be examined separately.

Request a detailed stock breakdown. Although the statutory investment disclosure requirement does not call for a product-by-product spreadsheet, this level of detail is important when assessing the estimate. Ask for quantities, unit prices, delivery charges, delivery lead times and expiry dates. If the commercial quotation differs from the COF, request written clarification before proceeding.

2. Test the quantities and product range against your location

A standardised package can make opening easier, but it will not always match local buying habits. An outlet near offices may sell a different mix of products from one in a residential neighbourhood, even under the same brand.

Ask how the initial order was calculated. Does the estimate draw on outlets with comparable locations, sizes and customer profiles? Is it based on opening-period sales, which may be temporarily high, or on normal trading after that phase?

Organise your assessment into three groups:

• Essential items: needed to provide the outlet’s core offering.
• Range-building items: provide more choice in size, colour, flavour or model, but may attract uneven demand.
• Promotional or seasonal items: depend on campaigns, particular dates or trends, making timing especially important.

For each group, compare the proposed quantity with a conservative sales forecast. One useful calculation is to divide the number of units available by estimated average daily unit sales: the result indicates how many days that stock might last. This is a projection, not a promise of performance.

Compare that stock coverage with the replenishment lead time. If deliveries are frequent and reliable, ask why you need to start with a large volume. If replenishment is slow, assess the risk of running out of your most popular product while others remain on the shelves.

3. Identify who bears losses and the risk of unsold stock

For perishable products, pay attention to the shelf life remaining on delivery, not just the total shelf life stated by the manufacturer. In other businesses, the risk may come from new collections, discontinued models or packaging changes.

Ask for written rules covering specific situations:

• deliveries with incorrect quantities, damaged goods or products that differ from the order;
• receipt of goods with a short remaining shelf life;
• leftover campaign stock after the campaign ends;
• changes to the mandatory product range shortly after opening;
• options for exchanges, returns or transfers between outlets.

Do not assume that unsold goods can be returned. Equally, do not confuse a commercial exchange policy with the rights that apply when goods are not delivered as agreed. Responsibility will depend on the circumstances and the relevant agreements.

Also check the goods-receiving process: who checks deliveries, records discrepancies and reports problems? A simple procedure using photographs and supporting documents helps preserve evidence. Before buying, confirm that the planned premises can accommodate the stock under appropriate storage and security conditions.

4. Align delivery, payment and opening dates

Draw up a timeline covering the order, delivery, opening date and the due date of each instalment. The key is to establish whether payments start before the outlet generates revenue, and what happens if opening is delayed.

Ask whether deliveries can be staggered without compromising initial operations. Check whether this changes prices, delivery charges or payment terms. A volume discount is only worthwhile if the savings outweigh the costs and risks of holding additional stock.

Take the order breakdown and commercial terms to the accountant and solicitor advising you on the purchase. They can help identify overlooked outgoings and unclear responsibilities.

Practical takeaway: before approving your initial stock order, make sure you have a product list, a justification for the quantities and documented rules for delivery, payment and losses. The aim is not to open with as much stock as possible, but with stock suited to your operations and expected demand.