Buying a NZ Franchise: Plan Your Working Capital

A franchise can look affordable on purchase day and still run short of cash soon afterwards. Working capital is the money that keeps the business operating while receipts catch up with payments. Before joining New Zealand’s franchising community, build a cash-flow plan that separates the cost of buying the business from the funding needed to keep it trading.

1. Separate the purchase budget from operating cash

Start with two schedules: money needed to complete the purchase and money needed afterwards. This prevents the same savings or borrowing facility being counted twice.

Your purchase schedule should include the agreed price, initial franchise fees, professional advice, applicable deposits and any opening stock or other payments not included in the price. Identify which amounts include GST and when payment is due. Ask your accountant to confirm the transaction’s GST treatment rather than assuming a refund will replenish your bank account.

Your operating schedule should cover wages, rent, stock replenishment, utilities, insurance, franchise charges, tax payments and debt repayments. Include a realistic allowance for your own income needs. If you intend to work without drawings initially, make sure your household has a separate funding plan.

Opening stock is not a permanent cash reserve. Once it sells, you may need to replace it before enough cash has accumulated to pay other bills. Equally, a rental deposit may remain unavailable throughout your occupation.

Ask the franchisor for a written breakdown of what its quoted investment includes and excludes. Treat any suggested working-capital allowance as a starting point to investigate, not a guarantee of sufficient funding.

2. Map when money actually moves

A profit forecast does not show whether you can meet Friday’s payroll. Build a cash-flow forecast showing receipts and payments in the periods when they will reach or leave your bank account.

For the opening months, a weekly forecast can expose shortfalls hidden within monthly totals. Extend the plan far enough to include seasonal trading, tax dates and major annual bills.

Check the timing of:

• Customer receipts: immediate payments, card settlement delays, invoiced work and overdue accounts.
• Supplier payments: advance orders, payment on delivery or agreed credit terms.
• Payroll: pay dates, holiday periods and associated employment costs.
• Franchise deductions: when recurring charges are collected, rather than simply when they are calculated.
• Tax and borrowing: GST, PAYE, income-tax obligations, interest and principal repayments, as applicable.

For an existing outlet, request bank statements, debtor and creditor reports, stock records and payroll summaries through an agreed due-diligence process. Reconcile these with the accounts using your accountant. Historical trading helps reveal payment patterns, but the seller’s supplier credit terms may not transfer to you.

For a new outlet, test assumptions about opening delays and the time needed to build repeat custom. Confirm when rent, wages and other commitments begin, even if the doors are not yet open.

3. Stress-test the lowest cash balance

Run a base forecast and a downside forecast. Use assumptions grounded in the outlet’s circumstances rather than an arbitrary percentage buffer.

What happens if opening is delayed, customers pay late or stock must be purchased earlier than expected? Could a seasonal slowdown coincide with an insurance renewal and a tax payment?

Identify the lowest projected cash balance. That funding gap, plus an accessible contingency, is more useful than a generic rule about keeping several months’ expenses in reserve.

Then distinguish funding that is genuinely available from funding you merely expect:

• Has the lender approved the facility in writing?
• Are any conditions still outstanding?
• Can the facility fund operating expenses, or only the purchase?
• When do repayments start?
• Is an overdraft subject to review or repayment on demand?

Discuss the downside forecast with your lender before committing. Do not assume further borrowing will be available after trading begins. Avoid counting uncertain tax refunds, hoped-for sales or stock at its retail value as readily accessible cash.

4. Put the funding plan into your buying decision

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or franchise registration requirement. General laws apply, including the Fair Trading Act 1986, which prohibits misleading or deceptive conduct and unsubstantiated representations in trade, and the Contract and Commercial Law Act 2017.

The Franchise Association of New Zealand’s Code of Practice and Ethics applies to its members; it is not legislation covering every franchise. Neither membership nor a disclosure document replaces an independent cash-flow assessment.

Ask your lawyer whether your purchase should be conditional on satisfactory due diligence and finance, with clear deadlines and requirements. Have your accountant confirm that the funding covers both completion and the forecast operating shortfall. Keep written records of significant statements about required cash reserves.

Practical takeaway: Before signing an unconditional commitment, know your lowest forecast cash balance, how you will fund it and what reserve remains if trading starts more slowly than planned.