Buying a franchise: planning your start-up cash needs

Funding the premises and the initial franchise fee is not enough to get a franchise off to a secure start. You also need to cover the first payments falling due while cash receipts are still irregular. Joining a franchise network provides a framework and know-how, but each business owner remains responsible for their own cash flow. Here is how to work out the cash reserve you need before committing.

1. Separate start-up investment, working capital and your cash buffer

A start-up budget can be misleading if it groups all expenditure under a single heading such as “required contribution”. To understand what your funding actually covers, distinguish between three categories.

• Start-up costs: the initial franchise fee, equipment, fit-out, professional fees and other costs incurred before opening.
• Working capital requirement, known in France as besoin en fonds de roulement (BFR): the money tied up in stock and customer receivables, offset in particular by credit extended by suppliers.
• Cash buffer: cash available to absorb a delayed opening, an unexpected expense or a slower build-up in trading.

These categories should then be brought together in a single cash flow timeline. Watch out for double counting: initial stock already included in start-up costs must not be added again to the overall funding requirement without an adjustment.

A business can be profitable on paper yet have too little money in the bank. Repaying the principal on a loan, for example, uses cash but is not an expense in the profit and loss account. Conversely, an accounting depreciation charge does not trigger a monthly payment.

2. Build a schedule of actual payments

Work with your accountant to prepare a monthly cash flow forecast covering the period before opening and at least the first year of trading. Add weekly monitoring for the periods when cash is likely to be tightest.

Record each cash movement on its likely payment date, not just the invoice date. Include customer receipts, funding received, purchases, rent, wages, social security contributions, insurance and loan repayments. Also include the business owner's remuneration and associated charges, according to the legal and employment status chosen.

Use the amounts that will actually enter or leave your bank account, including VAT where applicable. An expected VAT refund is not cash you can use immediately: take a cautious approach to its repayment timetable.

Ask the franchisor for a written schedule of start-up payments. Training, an IT subscription or an initial contribution to the network may be payable before your first sales. Check the payment terms for initial orders too: immediate payment ties up more cash than an agreed supplier credit period.

Finally, record each source of funding at the point when it will actually become available. A grant you have applied for, or a loan still subject to conditions, should not be treated as money already secured.

3. Identify the lowest cash balance and test timing changes

The crucial figure is not just your year-end balance: it is your lowest cash balance. A positive year-end figure can conceal an inability to pay wages several months earlier.

Start with a base-case forecast supported by evidence, then test specific timing changes:

• opening is delayed while rent and certain other costs are already accruing;
• business customers pay more slowly than expected;
• goods remain in stock for longer;
• an essential expense must be paid before the planned release of funding.

The aim is not to apply a universal safety percentage. The buffer you need depends on how the business operates, its seasonality and its payment terms. A business paid immediately for its sales has a different cash cycle from one that invoices for services after completing the work.

For each scenario, identify the maximum cash shortfall and the options available to cover it. An overdraft you are merely considering is not secured funding: its terms must be confirmed by the bank. Keep a separate personal reserve for your day-to-day living costs as well.

4. Check the information before committing funds

In France, franchising is not governed by a single dedicated legal regime: general contract law and commercial rules apply. Pre-contractual disclosure is governed in particular by the Doubin Law, codified in Article L. 330-3 of the French Commercial Code, and by Article R. 330-1.

Where the statutory conditions apply, the pre-contractual disclosure document and draft agreement must be provided at least twenty days before signing or making any advance payment. The brand-specific investment costs set out in this information are no substitute for your own cash flow calculations.

Have the quoted amounts checked against supplier quotations, contractual payment schedules and financing terms. Any expense that remains uncertain should be clearly flagged in your forecast.

Key takeaway: before signing, check that your available funds cover start-up costs, the cash shortfall at the lowest point in your forecast and an appropriate safety margin. Funding the opening is not enough: you also need to fund the first few months.