Buying a franchise: how much working capital do you need?

Buying a franchise requires more than enough money to cover the initial franchise fee, equipment and premises fit-out. Wages, rent and supplier invoices fall due even when sales do not yet cover all your outgoings. Before joining a franchise network, calculate your working capital needs: the funds required to finance day-to-day operations between paying suppliers and receiving payments from customers. This gap can determine whether an otherwise promising outlet survives its early months.

1. Separate the initial investment from operating funds

Divide the franchisor’s proposal into two categories: the costs of setting up the outlet and the funds needed to keep it running. If both are combined into a single ‘total investment’ figure, ask for a breakdown and an explanation of what the included cash reserve actually covers.

Initial costs may include the franchise fee, premises fit-out, equipment and initial training. For ongoing operations, account in particular for:

• wages, social security contributions and external contractor costs;
• rent, energy, insurance and software;
• stock replenishment and goods transport;
• ongoing franchise fees and marketing contributions;
• tax liabilities and finance repayments.

Record opening stock and security deposits separately to avoid counting them twice. A deposit is not necessarily a permanent expense, but the money is generally unavailable for day-to-day use. The same applies to cash tied up in stock: a full warehouse will not pay overdue bills.

2. Prepare a forecast of actual cash receipts and payments

A projected profit and loss statement is no substitute for a cash flow forecast. A sale may already have been recorded, while the customer pays the invoice later. Conversely, a supplier may require advance payment for goods you will not sell until some time afterwards.

Prepare a spreadsheet for each month showing your opening cash balance, expected receipts, payments and closing balance. A weekly forecast is also useful during the first weeks of trading, as monthly totals can conceal cash shortages along the way.

For every receipt, specify when the money will actually reach your account. Check settlement times for card payments and online platforms, as well as payment terms for business customers. For outgoings, use contractual due dates rather than the dates that would suit you best.

Pay particular attention to VAT. If you are VAT-registered, work with your accountant to map cash flows relating to output and input VAT, including the timing of payments and any refunds. Do not assume that the full amount received from a customer is income you can freely spend.

Include appropriate remuneration for your own work or planned drawings, depending on the legal structure of the business. Keep your personal household reserve separate. A franchise is not financially sustainable simply because its owner is temporarily covering living costs from other savings.

3. Set your reserve by testing a downside scenario

There is no sensible universal working capital figure or unsupported rule about how many months you should cover. Your needs depend on the outlet’s sales rate, margins, stock levels, payment terms and seasonality.

Start with a base-case forecast, then prepare a more cautious version. Assume slower sales growth, longer waits for payment or more cash tied up in stock. Test combinations of assumptions too: lower sales and higher running costs can occur at the same time.

Identify the lowest point in cumulative cash flow before additional financing. This shows the projected funding gap you will need to cover with your own funds or agreed external finance. Add a separately justified contingency reserve, rather than an arbitrary amount unrelated to the risks.

Ask the franchisor to explain the assumptions behind stock levels, payment terms and the pace of initial sales. Use the experience of comparable outlets to test your forecast, not as a guarantee. If you need a credit facility, check the drawdown and renewal conditions; do not treat finance that has not yet been approved as available cash.

4. Check which commitments could drain your reserve

Slovenia has no dedicated franchise law, compulsory franchise register or specifically prescribed franchise disclosure document. A franchise agreement is an innominate contract — one not specifically defined as a contract type in legislation — governed by the general rules of the Slovenian Obligations Code (Obligacijski zakonik, OZ), including the principle of good faith and fair dealing. Competition, tax and other rules also apply, depending on the nature of the relationship.

This framework does not provide a specific statutory formula for the cash reserve you need, nor does it automatically oblige the franchisor to fund any shortfall. Pay particular attention to minimum monthly fees, compulsory purchases and other payments that fall due regardless of sales performance.

If the franchisor offers deferred payment, make sure the amount, due date, any interest and early payment terms are set out in writing. Deferral eases today’s pressure but creates a future liability. Include its payment date in your forecast too.

Practical takeaway: before signing, secure separate budgets for opening the outlet and running it. Plan your purchase so that the funds genuinely available to you can cover a cautious scenario, not just the expected start to trading.