Financing your franchise organisation before the first outlet opens

Your existing business is doing well and you want to expand through franchising. Yet a healthy profit at your own outlet does not prove that you can also finance a franchise organisation. Preparing contracts, providing training and supporting franchisees all cost money before recurring income starts coming in. To build a sustainable franchise community, you should therefore draw up a separate financing plan for your role as franchisor. The purpose is not to set fees, but to establish whether you can actually meet your obligations.

1. Separate your own outlet from the franchise organisation

Start with two financial breakdowns: one for your existing business activities and one for the responsibilities you will take on as a franchisor. You can do this within the same business; it does not necessarily require a separate legal entity. The first priority is financial clarity.

At your own outlet, you pay for items such as staff, rent and stock. The franchise organisation brings different expenses: legal advice, the development of training materials, central systems and time spent providing support. Some costs serve both activities. Allocate these using a method you can explain, such as actual hours worked or the number of users of a system.

Include your own time too. If you start supporting franchisees, someone may need to take over your work in the existing business. Without those replacement costs, the franchise organisation will look cheaper to run than it really is.

Then distinguish between:

• One-off preparation costs: expenditure needed to get the franchise relationship under way.
• Recurring organisational costs: expenditure that continues even when no new franchisees join.
• Costs per new franchisee: such as training and support around an opening.

This prevents profits from your existing business from quietly masking persistent shortfalls in the franchise organisation.

2. Forecast cash flow, not just profit

A budget can show a profit while your bank balance leaves you short of cash. Suppliers may need paying before you receive income. Prepare a monthly cash flow forecast covering the preparation period through to beyond the first openings.

For each month, enter the opening balance, expected receipts, payments and closing balance. Include VAT, loan repayments and any expenditure on replacing assets at your own outlet. Ask an accountant to check that you have not confused cash payments with accounting expenses, or vice versa.

Do not automatically treat an initial franchise fee as money you can spend freely. You may still need to provide training and carry out work associated with the opening. Although you have received the cash, some of it is effectively needed to fund services you have yet to deliver.

Also examine what happens if expansion is delayed:

• A prospective franchisee decides not to sign.
• An opening is postponed while central costs continue.
• The first franchisee needs more support than expected.
• Turnover-based income takes longer to build up.

Do not use an arbitrary growth rate to make the figures work. Link receipts to specific events and make uncertainties explicit. Then calculate how much funding you would need in an adverse scenario, including enough headroom to meet existing obligations.

3. Link your financial capacity to the Dutch Franchise Act

In the Netherlands, the Dutch Franchise Act (Wet franchise) has been in force since 1 January 2021 and is incorporated into Book 7 of the Dutch Civil Code. The Act makes your financial capacity relevant to prospective franchisees: before entering into the agreement, you must disclose information including details of your financial position.

A financing plan does not replace this disclosure obligation. It does, however, help you explain clearly how you will fund the organisation, what resources are available and what dependencies exist. Distinguish between funds that are actually available, financing that has been committed in writing and applications still under review.

The Act also requires franchisors to provide the commercial and technical assistance and support reasonably needed to operate the franchise business. You should therefore budget for the capacity to provide it. Simply stating that future growth will pay for support offers little reassurance if that growth fails to materialise.

You must also allow for the statutory period of at least four weeks between providing the required information and entering into the franchise agreement. During this period, you may not require the prospective franchisee to make payments or investments connected with the franchise agreement. Do not, therefore, plan to use an initial franchise fee to resolve an immediate cash shortfall during this phase. Have your payment schedule reviewed by a legal adviser.

4. Set a financial threshold for launch

Before recruiting franchisees, decide what financial conditions must be met before you can proceed. These might include funds available for preparation, funded support capacity and sufficient cash headroom to cope with delays.

Record who will finance any shortfalls and on what terms. Are you using money from your existing business? Check that enough will remain for taxes, maintenance, staff and unexpected setbacks. If you seek external finance, discuss security requirements, repayments and restrictions with your adviser as well.

Update the forecast whenever an opening is postponed or a significant cost changes. If your cash headroom falls below the minimum you have set, postpone further expansion rather than cutting back on support.

The practical takeaway: only launch when you can support your first franchisee even if a second does not join for some time. That is a stronger foundation for your franchise community than a budget that only balances with rapid growth.