Buying a franchise: secure your working capital before opening

Buying a franchise means joining a network, but you still run your own business and are responsible for its payments. Even a business forecast to make a profit can run short of cash. Before signing, you therefore need to assess your working capital: the money that keeps the business running between paying out and receiving customer payments.

Separate set-up costs from cash flow needs

A breakdown of the initial franchise fee, equipment and other start-up costs does not show the full funding requirement. Once the business is established, it still needs to pay wages, stock purchases, insurance and franchise fees, for example, before sales generate enough cash coming in.

Prepare two separate forecasts. The first should show one-off payments up to opening. The second should show how your cash position changes during the start-up period and a normal operating cycle, including any seasonal fluctuations.

A profit and loss forecast shows profitability. A cash flow forecast shows whether you will have enough money when bills fall due. Stock purchases may need to be paid for long before the goods are sold. An invoiced sale may be recognised as revenue before the customer pays. Loan principal repayments affect cash without being expenses in the profit and loss account.

Ask the franchisor to specify what the set-up cost estimate covers and what it excludes. Ask explicitly whether it includes an estimated working capital requirement or just the cost of opening. Work out your personal living costs separately too, so that any necessary salary payments are not overlooked in the business budget.

Map out payment flows in the franchise model

Start with actual payment terms, not just estimated monthly amounts. Gather the franchise agreement, payment schedules, supplier terms and the terms of any payment services the business will use.

Then build a simple payment calendar. For each item, record the amount or basis of calculation, due date, recipient and source of the information. Flag anything that has not yet been confirmed.

Check the following in particular:

• Customer payments: When will card payments, invoice payments and payments through platforms become available in the business bank account?
• Stock: Is advance payment required, and how long is the money expected to be tied up in stock?
• Franchise fees: Are they payable in advance or in arrears, and when will the first invoice arrive?
• Payroll payments: When are wages, tax withheld from employees’ pay and employer social security contributions due?
• VAT: How do the business’s VAT reporting period and payment dates affect cash flow?
• Deposits and security: Must any funds be tied up and therefore be unavailable for day-to-day operations?

If the franchisor or a shared platform collects customer payments, you need to understand the settlement process. Ask when funds are paid out, what deductions are made and whether amounts can be withheld in cases such as customer complaints. Request a sample settlement statement.

Stress-test your ability to meet payments

Use the payment calendar to build a cash flow forecast showing opening cash, receipts, payments and closing cash. During a vulnerable start-up period, weekly planning can reveal problems that a monthly overview masks.

Then test events that affect timing, not just total sales. What happens if opening is delayed but certain payments still fall due? What if customers pay their invoices late? What if stock sells more slowly while the next delivery still needs to be paid for?

Clearly label your assumptions and choose stress scenarios relevant to the franchise model. The aim is not to predict exactly what will happen, but to identify when cash will be at its lowest and which payments cause that low point.

Next, set a cash reserve based on the risks identified. Do not use all available capital on setting up without assessing what you will need for day-to-day operations.

Match each potential shortfall with an action: additional capital of your own, an agreed deferral of a payment or an approved credit facility. Planning to apply for a loan is not the same as having funding available.

Confirm the terms before you commit

Sweden has specific legislation, the Act (2006:484) on Franchisors’ Duty to Provide Information. It requires franchisors to provide clear written information well before an agreement is entered into. This must cover, among other things, payments to the franchisor and other financial terms of the franchise agreement.

This provides an important basis for your payment plan, but it does not mean the franchisor guarantees that your working capital will be sufficient. The franchise relationship rests on an agreement between independent businesses, and general contract law also applies.

Ask for any uncertainties about advance payments, invoicing and settlement to be resolved in writing. If your forecast assumes a payment deferral, this must be agreed, not merely mentioned in a conversation.

Also confirm with your finance provider when the funds can actually be released, which conditions must be met and whether the funding may be used for day-to-day operations. Have an accountant check the payment flows and a solicitor or lawyer with franchise expertise review the contractual terms affecting them.

Practical takeaway: Do not sign simply because the initial set-up is funded. Make sure you can also get through the tightest cash flow period with confirmed payment terms and funds available.