Net worth is one of the bigger financial indicators that you will be required to understand and provide as you apply to open a franchise. Every franchisor will require a minimum net worth to qualify financially as a new franchisee. This minimum net worth amount will vary wildly by type of franchise, but it is a fundamental part of entering the franchise world.
What is Net Worth and How is It Calculated?
You must know and understand your net worth as you investigate franchise opportunities. It is the dollar amount that you have on hand to use for cash flow purposes. Your net worth is fairly easy to calculate, too. First, list all your cash accounts, retirement savings, investments, property, and other financial assets. Second, list all your liabilities like car loans, mortgages, credit card debt, student loans and any other debts. Third, subtract your liabilities from your assets. That number is your net worth.
Why Net Worth Matters to You and the Franchisor
For your uses, net worth is used to secure financing for your franchise and is reviewed to see how carefully you manage your wealth. It hints at how well you control your finances. But for franchisors, it does much more, and their minimums are there for a very good reason—to ensure that you have enough capital for success.
Franchisors often use net worth as part of the qualification process for a franchisee. They do this to determine which franchisee candidates are more likely to be successful. Now, money is not everything, but the person with inadequate capital will fail, so it is in everybody’s best interest to establish minimum net worth requirements.
The standards differ by franchisor because each type of franchise has different capital requirements. Those with heavy equipment or payroll responsibilities will require more access to capital to pay the bills and remain solvent while the franchise is becoming self-sufficient. But no matter the amount required, net worth is there to use until the franchise can carry itself. There must be enough net worth in liquid form to sustain the business through its infancy.
Why Net Worth Isn't Liked By Some
Some franchisees will not like a net worth requirement. It may seem onerous to a younger person with fewer savings or someone whose job was displaced by a business closure. Also, many prospective franchisees equate buying a franchise to buying a job or income stream even though that cannot happen on Day 1. Usually, it’s the other way around. A new franchisee is going from a position of income to a position of non-income (at least for a while), and the electricity must stay on and the doors stay open.
In Summary
Every franchisor has the same goal—to develop franchisees who make money to pay themselves and to pay the franchisor.
Net worth and liquid assets act as a safety net to meet that goal by being adequately funded. A franchise failure is far worse to the franchisor and the franchisee than the sale that never happens. Mutual success is the goal, so net worth will remain part of the qualification process. The minimum requirements are there for everyone’s benefit.
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Anne Daniells is a co-owner of Enterprising Solutions, a professional services firm specializing in corporate communication and financial improvement for businesses where she shares decades of corporate and entrepreneurial experience—including franchise ownership—in her writings on business culture. She has authored hundreds of articles for publications including AllBusiness.com, TweakYourBiz.com, and MSN.com. Reach out via her website for more on where corporate culture, communication, and human architecture collide.