Buying a franchise: budget for working capital too

When joining a franchise network, your funding needs to cover more than buying the business or paying the initial franchise fee. You also need money for the period when bills fall due but customer payments are not yet sufficient to cover them. Before committing to a purchase, prepare a funding plan that covers both the acquisition and any cash shortfall during the first few months of trading. This guide explains how to match the amount and availability of funding to your actual cash needs.

1. Separate the purchase cost from operating cash needs

Start by listing all payments due before opening or the change of ownership. Include the purchase price or initial franchise fee, essential initial investments, security deposits, professional fees and other start-up costs. For each item, note who is responsible for paying it, the due date and whether the amount is confirmed or still an estimate.

Alongside this, prepare a separate working capital calculation. Working capital is needed, for example, when wages, rent and supplier invoices must be paid before the corresponding sales receipts arrive. Even a profitable business can struggle to meet its payments if cash is tied up in stock or customers take time to pay.

When buying an existing franchise business, establish exactly how much cash the business will have available immediately after completion. Do not assume that money in the seller’s bank account or outstanding customer invoices from before the sale will automatically be available to you. The structure of the transaction and the agreed terms determine what transfers to the buyer.

Ask the seller or franchisor for a written payment schedule. As well as the total amount, you need to know which costs fall due before trading begins. These payments may create your first funding gap.

Avoid double counting: if opening stock is included in the purchase price, do not add it again as an acquisition cost. However, purchases needed to replenish that stock should still appear in your cash flow forecast.

2. Calculate the cash shortfall using payment dates

A profitability forecast helps you assess whether the business is financially viable, but you need a cash flow forecast to work out how much funding it requires. This records income and expenditure when money actually changes hands. A sale is not available cash until the customer pays or the payment provider transfers the funds.

Prepare a sufficiently detailed weekly forecast for the start-up period, then extend it month by month far enough to include any quiet season. Include at least:

• customer payments on their expected receipt dates
• stock purchases and other operating payments, with their due dates
• wages, employer contributions and payments needed to cover your own living costs
• taxes and the timing of VAT payments
• loan interest, capital repayments and other financing costs.

Treat VAT consistently. VAT collected from customers is not income the business can freely spend, even if it temporarily appears in the bank account. Ask your accountant to check the timing of tax payments and any refunds.

Also model a scenario in which opening is delayed, sales build more slowly than expected or customers pay later. Rather than choosing a round figure for your cash buffer, base it on the largest shortfall these scenarios reveal.

The lowest cash balance in the forecast shows when additional funding is needed. Add a justified safety margin to your funding plan as well. Keep your household finances separate from the business forecast: money set aside for the business cannot simultaneously cover your personal living costs.

3. Match funding sources to how long the money is needed

Speak to finance providers before making a binding offer to buy. Present the full acquisition budget, your cash flow forecast and an explanation of where your own contribution will come from. A well-known franchise brand alone does not demonstrate that your particular business can service its debts.

Potential sources of funding include your own funds, investor capital, a bank loan and deferred payment terms agreed with the seller. You can apply to Finnvera, Finland’s state-owned specialised financing company, for suitable financing or a guarantee for a bank loan. Availability and terms are assessed individually: a Finnvera guarantee does not mean automatic loan approval or remove the business’s obligation to repay.

Long-term investments generally need a different funding structure from short-term cash flow fluctuations. Ask your finance provider which solution suits each need. If working capital depends on a credit facility, check its duration, drawdown conditions, fees and whether its terms can change.

Compare more than just interest rates. Check arrangement fees, when capital repayments begin, reporting requirements and any financial covenants. If the plan only works during a repayment holiday, the funding is not yet on a sustainable footing.

If the seller allows deferred payment, agree the instalments and other terms in writing. Tell other finance providers about the arrangement too, as it may affect their assessment of the overall debt and funding structure.

4. Confirm that funds can be drawn down before committing

Finland has no dedicated franchising legislation, no statutory requirement for a standard-format pre-contract disclosure document and no official registration requirement for franchise agreements. Agreements are governed by legislation including the Finnish Contracts Act, while misleading business-to-business marketing is restricted by the Unfair Business Practices Act. The Competition Act and, depending on the circumstances, other general legislation also affect the terms of the relationship.

A franchisor’s financing presentation or an initial discussion with a bank is not a funding decision. Obtain a written decision and check every condition for drawing down the funds. For example, establish whether the finance provider requires signed agreements, payment of your equity contribution or completion of particular security arrangements.

Finally, put everything on a single timeline: when you commit to the purchase, when the first payments are due and when the funding can be drawn down. If there is a gap, resolve it before signing. Where necessary, seek professional help to negotiate a clause making the purchase conditional on securing finance, and define its terms and deadline precisely.

Practical checklist: secure the acquisition funds, calculate the largest operating cash shortfall and confirm the funding drawdown date. Only commit to the purchase when all three fit the same timetable.