IMPORTANCE OF WORKING CAPITAL

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The importance of having sufficient working capital is critical for a new franchise, especially during its startup phase (with many franchisors mandating a specific minimum). Working capital is essentially the readily available cash you have to cover the business's day-to-day operations and short-term obligations, the importance of which cannot be understated.

A. Covering the Pre-Profit Period

• Initial Lag: A new business, even a franchise with a proven model, will take time to build a customer base and reach the break-even point (where revenue covers all costs) and then profitability.

• Bridging the Gap: Working capital acts as a financial cushion, ensuring you can continue to pay all your bills during the initial months when your revenue is still ramping up and isn't enough to cover all operating expenses.

B. Funding Daily Operations

Working capital is the "lifeblood" that keeps the business running smoothly. It ensures you can cover essential, recurring costs:

• Payroll/Salaries: Paying employees on time, even before significant sales roll in.

• Inventory/Supplies: Purchasing initial and ongoing stock and materials needed to operate.

• Rent and Utilities: Covering fixed monthly costs for the physical location.

• Marketing & Advertising: Funding local campaigns to drive awareness and customers.

• Franchise Fees: Paying ongoing royalties and advertising fund contributions.

C. Managing Unexpected Challenges

• Emergencies: It provides a financial buffer for unforeseen issues, such as equipment breakdowns, unexpected repairs, or sudden increases in costs (like a spike in utilities or supplier prices).

• Cash Flow Fluctuations: Most businesses experience seasonal or cyclical sales patterns. Working capital allows the franchise to weather slow periods without incurring debt or cutting back on essential operations.

D. Establishing Strong Relationships

• Suppliers: Sufficient working capital lets you pay your suppliers promptly, which is crucial for securing favorable payment terms, ensuring reliable delivery, and building a strong reputation within the supply chain.

• Employees: Being able to pay staff consistently is vital for retention and morale.

E. Enabling Growth and Opportunity

• Seizing Opportunities: Having extra cash provides the flexibility to invest in new growth initiatives, like a local ad campaign, an immediate equipment upgrade, or hiring a key staff member, without having to wait for a loan or save up.

It should be noted that most franchisors require a new franchisee to have enough working capital set aside to cover at least three to six months of operating expenses, not including the initial investment costs (like the franchise fee, equipment, and build-out). Underestimating this amount is a common reason for new franchise failure.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.