Buying a franchise: calculate your true funding needs

When you buy a franchise, you join a franchise network, but you remain responsible for your own finances. A well-known brand will not pay the rent if sales are slow to build. That is why a funding application should start not with the initial franchise fee, but with one question: how much money will your outlet need before it can support itself?

1. Draw up a complete picture of all your commitments

Ask the franchisor for an itemised breakdown of costs and check it against the draft agreement, its schedules and the operations manual. A sales presentation is not enough. For each item, record the amount, when payment is due, the VAT treatment and any provisions allowing increases.

Divide your overview into three groups:

• One-off expenditure: the initial franchise fee, fit-out, equipment, opening stock, training, professional fees and security deposits.
• Recurring commitments: ongoing franchise fees, marketing contributions, software, insurance, rent, staffing and administration.
• Future expenditure: equipment replacement, mandatory refurbishment, new point-of-sale systems and additional training.

Pay particular attention to how fees are calculated. Is a percentage charged on turnover including or excluding VAT? How are returns, discounts and online sales treated? Is there a minimum payment if turnover falls short? Conditions like these can make even a low percentage a significant burden on cash flow.

Also ask which services are included. Support with opening does not automatically mean that travel time, additional guidance or local advertising are free of charge. Get any unclear answers clarified in writing.

2. Use the statutory disclosures to test your assumptions

The Netherlands has a Franchise Act (Wet franchise), incorporated into Book 7, Title 16 of the Dutch Civil Code. It sets out specific rules on the information to be provided before a franchise agreement is signed. For your funding budget, a key requirement is that the franchisor must disclose the fees, investments and other financial contributions expected of you.

You must also receive information about the franchisor’s financial position and financial data relating to the proposed location. If no data is available for that location, the franchisor must provide data from businesses it considers comparable and explain why they are comparable.

This is not a statutory guarantee of turnover or profit. Nor does the law automatically require the franchisor to prepare a turnover forecast. If you are given a forecast, examine the basis on which it was prepared.

For example, ask:

• Do the figures relate to a new outlet or an established one?
• Are the rent, opening hours and staffing levels comparable?
• Has the owner’s labour been realistically accounted for?
• Have temporary discounts or exceptional income been stripped out of the figures?

You must also provide relevant information about your own financial position and carry out reasonable due diligence. Ask an independent accountant to check that the figures, assumptions and contractual costs are consistent.

3. Calculate working capital needs with a monthly cash-flow forecast

A profit forecast shows whether your business could be profitable on paper. A cash-flow forecast shows whether you can pay every bill on time. You need both to establish your funding needs.

Prepare a monthly forecast of cash receipts and payments covering the preparation phase, start-up and the period beyond. Include the months before opening: rent, professional advice and fit-out work may already be costing money while no customers are paying you yet.

Be aware of the differences between expenses and cash flows. Loan principal repayments, for example, are not business expenses when calculating profit, but they are cash payments. Depreciation, by contrast, is an expense without a corresponding cash payment at that point. VAT can also tie up cash temporarily.

Include a realistic allowance for your living costs. If you operate as a sole trader, personal drawings are not wage costs, but they still reduce your available bank balance.

The largest cumulative cash shortfall in your forecast shows how much funding you need to cover the planned payments. Add a contingency buffer based on a reasoned assessment of uncertainty. Do not count opening stock or other expenditure twice if it is already included in the forecast.

4. Test setbacks and match funding terms to their purpose

Alongside your base case, prepare a downside scenario. Consider a delayed opening, slower sales growth, higher staffing costs or a lower gross margin. Base your assumptions on local conditions and conversations with existing franchisees, rather than arbitrary percentages.

Recalculate the lowest projected bank balance. Could you still cover interest, loan repayments and your personal expenses? Discuss in advance which expenditure could genuinely be postponed. Mandatory costs under the franchise system do not usually disappear simply because turnover falls short.

Match the type of funding to its purpose. A fit-out that will be used for years calls for a different funding term from a temporary peak in stock requirements. Compare loans and leasing arrangements on total payments, security requirements, personal guarantees and early termination conditions.

Finally, check that the terms of the franchise agreement and premises lease align sufficiently with the funding term. There is no automatic statutory right to renew a franchise agreement. A loan that continues beyond the agreement’s expiry can therefore pose a significant risk.

Practical conclusion: apply for funding only once you have reviewed all your commitments, your monthly cash requirements and a downside scenario together. Obtain any missing information before deciding whether the franchise is financially right for you.