Buying a franchise: work out your working capital needs before you start

When buying a franchise, it is easy to focus on the initial franchise fee, equipment and fitting out the premises. Yet the business also needs cash after opening: wages, rent and other bills fall due while you are still building a customer base. A franchise network brings together independent business owners, but a shared brand does not remove your own business’s liquidity risk. That is why you should assess your working capital needs separately from the initial investment costs, before making binding commitments.

1. Separate the purchase price from day-to-day funding needs

Working capital essentially funds the gap between paying your outgoings and receiving sales income. Cash may be tied up in stock and customer receivables, for example. Payment terms offered by suppliers can reduce that need. A new business also needs a cash buffer for the period when trading does not yet cover all its payments.

Divide your funding plan into three separate parts: one-off start-up costs, the cash shortfall during the launch period, and a contingency buffer. This helps prevent the initial franchise fee, for example, from using up money intended for the first wage payments. Nor should you treat a loan paid into the business bank account as sales income.

Before deciding, gather at least the following information:

• When are the initial franchise fee, equipment purchases and any deposits payable?
• How much opening stock is needed, and when will it need replenishing?
• Will rent, system fees or other fixed outgoings become payable before opening?
• When will wages, associated employer costs and payments needed to cover your own living expenses affect cash flow?
• How quickly will customer payments become available to the business?

If you are buying the business and assets of an existing franchise operation, establish separately which working capital items are included in the sale. Stock may be included, but the seller’s cash and trade receivables may not transfer. Paying the purchase price therefore does not guarantee that the buying company will have cash available on the next payday.

2. Forecast cash flow by payment date

A profitability forecast shows whether the business can make a profit. A cash flow forecast answers a different question: will there be enough money when payments fall due? You can make profitable sales and still struggle to pay your bills if customers pay later than your own payment deadlines.

Prepare a weekly cash flow forecast for the start-up period, then continue it monthly far enough ahead to capture seasonal fluctuations in trading. For each period, record the opening cash balance, expected cash receipts, payments due and closing cash balance. Use payment dates, rather than simply invoice dates or the periods in which costs are recognised in the accounts.

Include the cash flow effects of VAT. VAT collected on sales is not income you can freely spend, and recoverable VAT on purchases may not return to your bank account when you pay the invoice. Review your business’s VAT reporting period, entitlement to deductions and payment timetable with your accountant. Record loan principal repayments as cash outflows too, even though they are not expenses in the profit and loss account.

Look at the lowest cash balance in the forecast. If it falls below zero, your planned funding is insufficient under those assumptions. However, the extra funding required is not necessarily limited to the size of that negative balance: the business also needs room to absorb normal variations in payment timing.

Prepare an alternative scenario in which opening is delayed or sales build more slowly than expected. The aim is not to guess the worst possible outcome, but to see how long the business can cover essential outgoings without a fresh funding decision.

3. Confirm when funding will be available, not just how much

As a franchisee, you set up your own business and arrange its funding. Finland’s public-service portal, Suomi.fi, points out that members of a franchise network are responsible for their own obligations and bear the risks of running their businesses. A well-known brand or a positive conversation with a bank therefore does not mean that working capital funding is already available.

Present your investment funding and working capital requirements separately to the lender. Discuss how much will be financed through equity, how much through borrowing, and whether a credit facility is needed to manage cash flow fluctuations. Financing long-life equipment and maintaining enough cash to pay daily bills serve different purposes, even though they form part of the same overall plan.

Ask for written details of drawdown conditions, the period during which funding is available, repayments and charges. In particular, check whether you can draw down the loan before the first major payments fall due. Include only funding whose availability and timing have been confirmed with sufficient certainty in your cash flow forecast; keep any additional funding you have yet to apply for as a separate scenario.

A guarantee from Finnvera, Finland’s state-owned financing company, may help secure bank finance in suitable circumstances. However, a guarantee does not itself put money into the business bank account or remove the obligation to repay the loan. Ask your bank which solution is suitable for your business and check its current terms. Do not base your ability to pay bills at opening on the assumption that further funding will be approved later.

4. Build the franchisor’s payment schedule into your cash flow plan

Finland has no specific franchise law or prescribed franchise pre-contractual disclosure requirements. The contractual relationship is governed, among other things, by the Finnish Contracts Act and general principles of contract law. Misleading conduct in business-to-business marketing is also assessed under Finland’s Unfair Business Practices Act. The Finnish Franchising Association’s code of ethics is a form of self-regulation, not legislation.

For working capital purposes, what matters is what the agreement says about when payment obligations begin and when payments fall due. Ask the franchisor for a payment schedule and compare it with the agreement and your own planned opening date. Establish whether payment obligations will continue as scheduled even if work on the premises or the start of trading is delayed.

If you need a phased payment schedule, negotiate it before signing and record the agreed changes in the contract. A verbal promise of flexibility is not a safe basis for a cash flow plan. Support from the franchise network is valuable, but it should not be counted as funding without an explicit commitment.

Practical checklist: separate investment costs from working capital, calculate your lowest cash balance and confirm the funding drawdown date. Commit to the purchase only once the business can withstand a realistic delay in opening without relying on a new loan.