Buying a franchise: calculate the working capital you need

The fit-out is paid for, finance is in place and your franchise outlet is ready to open. But is there enough money for the first wages, fresh stock and tax payments? Each franchisee remains responsible for meeting their own financial obligations. Before buying, therefore, look beyond the total investment and focus on the cash you will need to keep available until the outlet can support itself.

1. Distinguish between profit and available cash

A profit forecast shows whether revenue is expected to exceed costs. A cash flow forecast shows when money will actually come in and go out. For your working capital needs, the second forecast is particularly important.

The difference can arise, for example, because you pay for stock upfront while customers pay later. Loan repayments also require cash without appearing as an expense in the profit calculation. Depreciation, by contrast, is an expense but does not involve a payment at that point.

Prepare two separate budgets:

• A start-up investment budget: what one-off expenditure is needed to get started?
• A cash flow forecast: what receipts and payments do you then expect each month?

Include the period before opening. Rent, training and staffing costs may start accruing before you generate any sales. Avoid double-counting: initial stock paid for in advance should not appear again as the same payment in the opening month.

2. Gather the franchise network’s payment terms

A list of franchise fees is not enough to establish your cash requirements. You also need to know when payments will be collected and how any advance payments are calculated.

Ask the franchisor for specific payment terms covering, among other things:

• initial stock and subsequent deliveries;
• royalties, advertising contributions and other recurring fees;
• security deposits and advance payments;
• centralised invoicing and the transfer of customer payments to you;
• adjustments for returns, discounts and any credits.

With centralised payment processing, there may be a delay between a customer’s purchase and the money reaching your business bank account. Check who receives the money, when it is paid out and which amounts are deducted first. A high balance in the sales system does not necessarily mean cash is immediately available to spend.

The Dutch Franchise Act (Wet franchise), incorporated into Book 7, Title 16 of the Dutch Civil Code, has been in force since 1 January 2021. Article 7:913 of the Civil Code requires the franchisor to provide information before the agreement is signed, including details of fees, investments and other financial contributions. Relevant financial information must also be supplied, including information about the proposed location or, if that is unavailable, businesses deemed comparable on stated grounds. Use this information to support your calculations; it is not a guarantee that your own cash reserve will be sufficient.

3. Calculate your lowest bank balance

For each month, set out an opening balance, receipts, payments and a closing balance. The closing balance becomes the following month’s opening balance. Consider preparing a weekly forecast for the vulnerable opening period too: a positive month-end balance will not prevent you from missing a wage payment halfway through the month.

Alongside supplier payments and franchise fees, include rent, wages, insurance, interest, loan repayments and taxes. Treat VAT consistently in your cash flows and schedule VAT payments or refunds separately. Agree the approach with your accountant.

Set aside money for your living costs as well. If you operate as a Dutch sole trader (eenmanszaak), personal drawings are not business expenses, but they still reduce your available bank balance. If you operate through a Dutch private limited company (bv), your salary may instead be a business payment.

The lowest forecast balance shows when the largest funding gap will arise. Then calculate how much additional funding you need to cover that gap and still retain a reserve. There is no legally prescribed standard cash buffer for every franchise outlet. The appropriate amount depends on factors such as payment terms, stock levels, seasonality and fixed commitments.

4. Test setbacks and check your funding

Prepare a downside scenario alongside your base case. What happens if the opening is delayed, customers pay more slowly or stock takes longer to sell? Adjust both receipts and payments. Some expenditure falls as sales decline; rent and loan repayments usually do not.

Next, check that your funding will actually be available when the shortfall is greatest. A loan for the fit-out cannot automatically be used freely to pay wages. Credit facilities may be subject to limits, security requirements and drawdown conditions. Only include funding that you can reasonably rely on being available.

Agree a minimum cash balance with your accountant and decide in advance what action to take if you risk falling below it. Options include speaking to your lender early, adjusting stock orders within the franchise network’s rules or postponing non-essential expenditure.

Practical takeaway: only sign once you can explain which month your cash position will be weakest, why that will happen and what available funds will see you through.