Buying a franchise: calculating your working capital needs

A franchise outlet can generate sales and show a profit yet still lack the cash to pay staff or suppliers. Before entering the franchise market in Portugal, assess the timing gap between outgoing and incoming payments. This guide focuses on that working capital requirement: the money that keeps the business running while revenue is not yet arriving in time to cover its commitments.

1. Separate your initial investment from operating cash

The budget provided by the franchisor may include fit-out work, equipment and the initial franchise fee without covering all the liquidity you will need after opening. So the question should not simply be ‘How much does it cost to open?’ but also ‘How much cash must remain available to keep the business running?’

In accounting terms, working capital and working capital requirements are distinct concepts. To inform your decision, ask your accountant to translate both into a cash flow forecast: when money comes in, when it goes out and how much remains available at each point.

Organise your budget into three sections:

• Pre-opening expenditure: payments needed to prepare the outlet;
• Operating cash flows: customer receipts and recurring payments once trading begins;
• Cash reserve: funds available to cover the temporary shortfalls identified.

Avoid counting the same amount twice. If an initial purchase is already included in your opening investment, do not include it again as a payment in the first month unless that is when it is actually paid. A refundable deposit also ties up cash, even though it is not a permanent expense.

2. Establish the actual schedule of receipts and payments

Ask the franchisor how the business model works financially, without assuming that every outlet operates on the same terms. The aim is to understand what affects your cash position, not to obtain a promise of profitability.

For incoming payments, clarify:

• Whether customers pay immediately or are given time to pay;
• When payments through platforms or intermediaries become available;
• Who receives the proceeds from centralised sales and when they transfer them to the outlet;
• How refunds, returns and withheld amounts are handled.

For outgoing payments, identify the due dates for rent, wages, social security contributions, taxes, services and franchise charges. Include the stock replenishment purchases needed to keep trading.

A recorded sale does not necessarily mean cash is available. Equally, receiving payment in advance can create future obligations to provide services or issue refunds. Do not automatically treat those funds as freely available cash.

Ask for written confirmation of payment timings controlled by the franchisor. For the rest, obtain the terms from the suppliers, banks or service providers involved. A general sales assurance is no substitute for a verifiable payment schedule.

3. Calculate the point of greatest pressure on cash

Build a monthly cash flow forecast covering the start-up phase and a full seasonal cycle. For the tightest periods, break it down by week: a positive month-end balance can conceal a cash shortage on payday.

For each period, record the opening balance, add expected receipts and subtract payments. The closing balance becomes the opening balance for the next period.

Run the calculation first without adding a reserve that would mask any shortfalls. This identifies the largest cumulative cash shortfall, helping you determine how much additional liquidity you need. Then add a prudent buffer based on the outlet’s specific risks, rather than applying an arbitrary percentage.

Test specific scenarios: slower customer payments, suppliers demanding payment in advance or sales concentrated in particular months. Also assess whether growth means paying for more stock or labour before receiving payment from customers.

Do not count an unapproved loan as available cash, or a credit facility whose use depends on conditions you have yet to meet. Your reserve must be accessible when the forecast shows it is needed, rather than merely forming part of a financing plan.

4. Check what the law and the contract guarantee

Portugal has no franchise-specific legislation or mandatory pre-contractual disclosure document with content and timing requirements specific to the sector. There is therefore no statutory minimum working capital reserve specifically required to buy a franchise.

The general rules of the Portuguese Civil Code apply, including freedom of contract under Article 405 and good faith in negotiations and contractual performance under Articles 227 and 762. Where standard contract terms are used, Decree-Law No. 446/85 of 25 October, as amended, also imposes duties to communicate terms and provide information.

These duties do not make the franchisor responsible for ensuring you have enough cash. If the franchisor says a particular amount ‘is sufficient’, ask for the underlying assumptions: which expenses it covers, the timing of receipts and the payment terms used. Also check whether the contract requires you to maintain minimum levels of liquidity or financial resources.

Practical conclusion: before signing, ask your accountant to validate the largest cumulative cash shortfall and confirm that you have accessible funds to cover it. The money needed to open must not use up the money needed to stay open.