Franchising in Portugal: planning start-up cash flow

Turning an existing business into a franchise proposition means understanding when the new franchisee will have to pay, not just how much they will need to invest. An outlet may look viable yet run out of cash before attracting enough customers. To grow responsibly within Portugal’s franchise sector, franchisors should prepare a start-up cash flow forecast based on actual experience and adapted to the circumstances of each opening.

1. Reconstruct the cash needed before the first sale

Start with the cash movements in the existing business. Review invoices, statements, contracts and payment records to identify the expenses incurred before opening. Separate documented amounts from current estimates and flag any circumstances unlikely to be repeated, such as building work carried out by the landlord or equipment bought on exceptionally favourable terms.

The aim is not to recalculate royalties or promise profitability. It is to build a sequence of cash outflows that the prospective franchisee can verify.

Organise the forecast around specific stages:

• Preparation: company formation, professional advice and any necessary studies.
• Fit-out: deposits, rent before opening, building work, equipment and utility connections.
• Operational preparation: opening stock, recruitment, training and travel.
• Launch: launch activities, consumables and initial running costs.

Include payments to the franchise network in the same schedule as local expenses. A budget that highlights only the initial franchise fee leaves out commitments that may fall due before any revenue comes in.

2. Link each payment to a verifiable condition

For each cash outflow, record the recipient, amount, expected date, the condition that triggers payment and whether the money can be recovered. Distinguishing an advance payment from a non-recoverable expense helps clarify what happens if the project is delayed or does not go ahead.

Do not treat supplier quotations as guaranteed terms. A supplier may require advance payment from a new franchisee even if it offers credit to the company-owned outlet. Also check whether prices include VAT and when the tax will need to be paid. Any entitlement to deduct VAT does not mean that cash is immediately available; the treatment should be confirmed with a certified accountant in Portugal.

Align the schedule with the contractual documents. If a payment to the franchise network depends on a particular service being provided, the description of that service and the payment due date should be consistent across the contract and the cash flow forecast.

Portugal has no specific franchise law or compulsory dedicated register of franchisors. The general contract rules in the Portuguese Civil Code apply, including freedom of contract under Article 405, good faith in negotiations under Article 227, and good faith in performance under Article 762. Presenting materially incomplete cost information may, depending on the circumstances, give rise to pre-contractual liability.

There is also no specific statutory pre-contractual disclosure form for franchising. This does not remove the need to provide relevant information or to communicate and explain standard contract terms adequately where Decree-Law No. 446/85 applies.

3. Extend the forecast into the first months of trading

The first sale does not end the need for funding. After opening, wages, rent, supplies and payments to the franchise network continue to fall due, even if trading remains slow.

Prepare a weekly forecast for the fit-out phase and a monthly forecast for the initial trading period. For each period, show the opening balance, cash receipts realistically expected, payments and closing balance. Invoiced sales and cash received are not necessarily the same thing.

Test straightforward adverse scenarios without assigning invented probabilities to them:

• Opening is delayed, but rent and some wages are already due.
• Sales grow more slowly than expected.
• Stock needs replenishing before customers pay.
• An item of equipment requires an advance payment that was not initially included.

Identify the point at which the cumulative cash balance is lowest. This shortfall helps determine the funding required, to which you should add a safety buffer justified by the risks identified. There is no universal cash reserve suitable for every outlet.

4. Confirm resources before making commitments

The franchisor should distinguish between available capital, approved credit and funding that has merely been applied for. Submitting a bank application does not mean the money will be available when payment for building work falls due.

Before making commitments that are difficult to reverse, review the forecast with the prospective franchisee and their accountant. Identify who will bear any cost overruns, which expenses can be deferred and which circumstances would require the opening timetable to be reassessed. Record the assumptions and review date without treating this check as a guarantee of success.

Practical takeaway: before committing to an opening, confirm that every payment has a date, a condition and a source of funding. A financially sound launch needs cash available at the right time, not just a budget that balances on paper.