Buying a franchise: Calculate your cash buffer before opening

You may be able to afford to buy a franchise without having enough cash to keep it running through the start-up phase. Fit-out costs, a deposit and initial stock are only part of what you will need. Within a franchise network, your own business must also be able to pay its bills while you build a customer base. That is why you should calculate your cash buffer before committing to the purchase.

1. Track the money from the first payment

A profit and loss forecast shows whether the business is expected to make a profit. A cash flow forecast shows when money actually enters and leaves your account. The distinction is crucial: a business can be profitable on paper yet lack the cash to pay staff or suppliers.

Start your forecast with the first payment, not opening day. Include all costs incurred before opening and continue through the start-up period until the business is expected to sustain itself. A forecast that ends midway through a seasonal downturn may conceal your peak funding requirement.

Break payments down into specific categories:

• One-off payments such as the initial franchise fee, deposit, fixtures and fittings, and professional advice.
• Pre-opening costs, such as rent, wages during training and local marketing campaigns.
• Ongoing payments for stock, wages, insurance, systems and fees payable to the franchisor.
• VAT, taxes, interest and loan repayments, where relevant.
• The salary or personal drawings you need to take from the business, depending on its legal structure.

Allocate each item according to its payment date. An asset purchase may hit your bank account in full on delivery, even if its cost is depreciated over several years in the accounts. A deposit also ties up cash, even though it is not a normal operating expense.

2. Calculate when sales turn into cash

Revenue is not the same as money in the bank. Check how payments work in the particular franchise concept you are considering.

Do customers pay immediately, or do you sell on invoice? How quickly do payment providers and any platforms transfer funds to you? If the franchisor receives customer payments and passes them on to you later, your forecast must account for the timing of those transfers and any amounts withheld.

Gift cards, advance payments and subscriptions need particular attention. Establish who receives the money, who must provide the service and how your outlet is paid. Do not forecast cash from a sale if the money initially goes to another party.

Then compare incoming payments with your own payment deadlines. If you must pay for goods before delivery but customers pay later, you are funding the gap. Building up stock can increase this pressure, even when sales are growing.

Ask for the specific settlement terms and a sample settlement statement. Have an accountant check the VAT treatment: recoverable input VAT does not necessarily mean the money will be back in your account when you need to pay the supplier.

3. Find the lowest point and test the impact of delays

Calculate a running bank balance for each month, ideally with weekly figures around opening. Add expected receipts to the opening balance and subtract payments. The lowest point shows how much cash the plan requires before you add a safety buffer.

Keep three figures separate: the total capital required, the funding actually available and the additional reserve for departures from the plan. An anticipated loan or a possible further capital contribution should not be treated as available cash.

Then model alternative scenarios in which:

• Opening is delayed while fixed costs continue.
• Sales build more slowly than expected.
• Customers or payment partners pay later.
• Stock sells more slowly, or an essential expense falls due earlier.

Avoid setting your buffer as an arbitrary percentage of the purchase price. Instead, calculate how much these specific changes worsen your lowest balance. There is no single amount that suits every franchise network.

Set your own warning thresholds too: at what balance should you postpone a non-essential investment, limit stock purchases or contact the bank? Any action you take must be permitted under the franchise agreement.

4. Check what triggers payments under the agreement

Denmark has no dedicated franchise law, no franchise-specific registration scheme and no statutory standard package of pre-purchase disclosures. Franchise agreements are governed, among other things, by the Danish Contracts Act and general principles of contract law. The Danish Competition Act, the Danish Marketing Practices Act and other relevant legislation also apply. Depending on the circumstances, general duties of good faith and disclosure may require material information to be disclosed.

You therefore cannot assume that the franchisor is legally required to provide a cash flow forecast. Check for yourself which events trigger payment: signing, ordering, delivery or actual opening. In particular, establish whether recurring payments begin even if opening is delayed, and who bears the costs during the wait.

Ask a professional adviser to check the payment provisions against your forecast. No budget item should assume a payment deferral that the agreement does not entitle you to.

Practical takeaway: Only buy once you can explain your lowest projected bank balance, fund a realistic delay scenario and demonstrate that your reserve will be available when the bills fall due.