Buying a franchise: calculate your working capital needs

Buying into a franchise requires more than the money needed to open an outlet. Once you start trading, wages, rent and suppliers still need to be paid, even before sales have settled into a steady pattern. Working capital bridges that gap. Calculating it properly helps you assess whether a franchise opportunity is genuinely affordable, without confusing expected profitability with available cash.

1. Separate opening costs from day-to-day operations

Prepare two separate budgets. The first covers set-up costs: the initial franchise fee, fit-out, equipment, rental deposits and initial professional fees. The second sets out the cash needed to fund operations until receipts consistently cover payments.

In the second budget, include payroll and employer contributions, rent, energy, stock replenishment, insurance, accountancy services, ongoing royalties and advertising contributions. Also record loan repayments and tax payments on their actual due dates. Repaying loan principal, for example, reduces your cash balance without being an operating expense in the profit and loss account.

Do not count the same amount twice. If opening stock is already included in your opening costs, note when it must be paid for and when it will need replenishing. Rental deposits are not available cash, even if you expect them to be returned in the future.

Budget separately for your personal needs too. If you work in the outlet every day, assuming you will not need to be paid can make an underfunded investment appear viable.

2. Turn sales forecasts into a cash flow forecast

Ask the franchisor for the assumptions behind its financial forecasts: how long sales take to reach a steady level, seasonality, product costs and ordering frequency. Figures from comparable outlets are more useful than an overall average, but they do not guarantee results at your location.

With your accountant, prepare a monthly forecast for the first year and a more detailed weekly forecast for the initial period. For each period, record:

• the opening cash balance,
• receipts when the money is expected to arrive, not when the sale is recorded,
• payments on their due dates,
• funding drawdowns only when sufficiently assured,
• the closing cash balance.

Sales through platforms, card payments and credit sales may all have different settlement times. Likewise, VAT collected should not be treated as cash you are free to spend. Your accountant needs to factor in VAT offsets and payment deadlines.

The largest cumulative cash shortfall, before any new funding, indicates your core funding requirement. Add a contingency reserve based on clear assumptions, rather than choosing an arbitrary amount simply because it fits your budget.

3. Check which contract terms tie up cash

Two franchise opportunities with similar set-up costs may require very different levels of working capital. The difference often lies in payment terms rather than the initial franchise fee.

Read the franchise agreement alongside the supply terms. Are there minimum orders, mandatory stock levels or advance payments? Are ongoing royalties calculated on sales or on cash received? Is there a minimum payment regardless of turnover? Who funds the discounts offered in a network-wide promotion?

Greece has no dedicated law providing a comprehensive framework for franchising, nor a specific statutory system of mandatory pre-contractual disclosure for franchises. The general provisions of the Greek Civil Code apply, particularly freedom of contract and good faith. Articles 197–198 concern conduct during negotiations and liability for damage culpably caused at that stage. Competition rules also apply, including Greek Law 3959/2011 and, where the relevant conditions are met, Article 101 of the Treaty on the Functioning of the European Union (TFEU).

The European Code of Ethics for Franchising calls for full and accurate written disclosure within a reasonable time before a prospective franchisee makes a commitment. It is a self-regulatory instrument, not Greek law. Request written clarification of charges and have a lawyer review the terms governing any changes to them.

4. Stress-test your funding

Do not rely solely on the base case. Calculate what happens if opening is delayed, sales grow more slowly or suppliers demand earlier payment. Combine adverse assumptions that could realistically occur together.

If a funding gap emerges, consider your own capital, agreed supplier credit or bank finance. Compare interest rates, fees, security requirements, personal guarantees and the timing of funding drawdowns. A pending application or a possible grant is not the same as available cash.

Also set a minimum cash balance that will trigger a spending review and discussions with your finance providers before payments become overdue.

Practical takeaway: Your investment must fund not only the opening, but also the period until the business is operating steadily. Choose a franchise opportunity whose adverse cash flow scenario you can cover with confirmed funding.