Buying a franchise: assessing initial stock in Portugal

When entering the Portuguese franchise market, a buyer may focus on fitting out the premises and paying the initial franchise fee, leaving stock as an afterthought. Yet a fully stocked shop is not necessarily ready to sell. Initial stock turns available cash into products that may take time to sell. Before signing, you need to understand who sets this investment, how the quantities have been calculated and who bears the risk of unsold stock.

1. Ask for a product list, not just a total figure

A budget with a line labelled ‘opening stock’ is not enough to assess the commitment. Ask for an itemised list showing product codes, quantities, purchase prices, applicable taxes and delivery terms. Check whether it includes transport, storage, display assembly or other associated charges.

Distinguish products intended for sale from demonstration items, samples, consumables and display materials. All may require cash at start-up, but not all generate direct revenue.

For each product group, establish:

• What is the minimum quantity required to open?
• Which quantities are mandatory under the brand’s requirements, and which are merely recommended?
• Are any products seasonal, perishable or likely to be superseded quickly?
• Can the order be delivered in stages?
• Who can authorise changes to the initial product mix?

Also ask for the commercial rationale behind the proposed quantities. A stock package used at another outlet may be a useful reference, but it does not, on its own, show that the same mix will suit your premises.

2. Match quantities to the rate of sales

The key question is not just how much the products cost to buy, but how long that money will remain tied up. An apparently healthy margin does not solve the problem of items sitting in storage for months.

Build a spreadsheet for each product category. Record the initial quantity, a cautious estimate of monthly sales and the usual replenishment lead time. Dividing the units available by estimated monthly unit sales gives a simple indication of how many months the stock will last, provided the units are comparable and demand does not fluctuate too much.

Treat this stock cover as a working assumption, not a guarantee. Seasonal products, sizes, colours or different models can sell at very different rates within the same category.

Ask the franchisor for information that helps you understand stock turnover and how often products fail to sell. Distinguish sales to consumers from orders placed by franchise outlets: supplying goods to the network is not the same as selling them to the end customer.

Also compare the initial quantity with the speed of replenishment. If deliveries are frequent and reliable, question the need to hold large volumes from day one. If lead times are long, weigh up the risk of stock shortages against the risk of excess stock.

3. Confirm in writing who bears losses and takes responsibility for unsold stock

Portugal has no specific franchising law or standardised pre-contractual disclosure document required by legislation specifically governing franchise agreements. General contract rules apply, including freedom of contract under Article 405 of the Portuguese Civil Code and the duties of good faith in negotiations and performance under Articles 227 and 762.

This makes it important to clarify the terms before signing, without assuming there is an automatic right to return unsold business stock. Purchases made to run a business do not generally benefit from rights reserved for consumers.

Ask for the relevant contractual documents to clarify:

• When the risk of loss or deterioration passes to you;
• How shortages, damage or discrepancies on delivery must be reported;
• Whether unsold items can be exchanged or returned, and on what terms;
• Who pays for return transport and any associated charges;
• What happens when the brand discontinues products or changes their presentation.

Distinguish a return due to a defect from a return due to lack of demand. These are different situations. A sales promise to ‘help shift stock’ is not the same as a commitment to buy it back. Have these terms reviewed by a legal adviser before committing to the order.

4. Align payments with cash-flow needs

Map out the order date, delivery date, invoice due dates and expected start of sales on a calendar. Even with deferred payment terms, you may have to pay for goods before recovering the investment through customer sales.

Test a slower-sales scenario and include the replenishment needed for your best-selling items. It is possible to hold too much stock overall while simultaneously lacking the cash to replenish the most popular products.

Confirm with your accountant how VAT is treated and the distinction between purchasing stock, recognising the cost of goods sold and making payments. Accounting profit and available cash are not the same thing.

Practical conclusion: before buying the franchise, obtain a costed list of initial stock, written terms for unsold goods and a payment schedule. Only commit to the order once you understand how much capital will be tied up and how you will keep the business running if sales take time to materialise.