Franchise Net Worth Requirements
Franchise opportunities, like any business startup, are complex ventures. Franchisors often require a minimum net worth requirement to ensure franchisees have the funds to cover the expenses that come with franchising. Learn more about how net worth plays a part in qualifying a potential franchisee.
What Are Net Worth Requirements for Franchises?
Net worth requirements for franchises can vary based on many factors—there’s no universal requirement. Franchisors set the figure based on their own business model and financial considerations. The requirements are established for good reason: it helps a franchisor qualify a potential franchisee. It demonstrates that they have the necessary funds to support the needs of the new business.
Some franchisors list minimum and maximum thresholds for qualification. High net worth isn’t always a must-have, but they always consider a minimum net worth as part of the qualification process. Franchisors want to find partners with a net worth relative to the total investment needed to open and run the business. By setting expectations, franchisors can identify partnerships with individuals who seem likely to succeed and grow.
What Is the Difference Between Net Worth and Liquid Capital?
Net worth and liquid capital are used to calculate financial stability, but they represent different things to a franchisor.
The term "liquid capital” pertains to assets that can readily be converted into cash. These assets are included in one’s total net worth, but only include specific assets, such as in-hand cash, checking and savings accounts, mutual funds, and short-term bonds.
Net worth is a more comprehensive view of one’s financial stability. Net worth calculations include liquid assets, illiquid assets, long-term investments, and debts, such as credit card balances, Small Business Administration (SBA) loans, student loans, and mortgage obligations. It looks at the big picture, taking assets and liabilities into account.
By scrutinizing the availability of liquid capital alongside the broader evaluation of a prospective franchisees net worth, a franchisor can qualify a business owner on the path to franchise ownership.
Why Do Franchises Require a Minimum to Enter Into an Agreement?
Franchisors don’t readily extend their brand to just any entrepreneur. A potential franchisee must be able to demonstrate their commitment by providing evidence of an initial investment that can cover expenses. Launching a franchise requires a financial investment on the part of the franchisee.
Franchised businesses must adhere to a specific set of common objectives. This can range from maintaining branding to investing in employee training or purchasing uniforms. As a new franchise owner, readiness to invest in operations and navigate unforeseen challenges is essential to success.
Moreover, successful franchise owners have a long-term perspective and growth strategy. Their net worth and access to liquid capital can increase the likelihood that they’ll pursue additional franchise investments, deepening their commitment to the brand.
How Do You Calculate Net Worth?
Net worth is a calculation that subtracts your liabilities’ total value from your assets’ total value. A positive net worth demonstrates that you have more valued assets than you do debts, while a negative net worth suggests that your debts exceed the total value of your assets.
What Are Examples of Net Worth?
- Cash
- Checking and savings account balances
- Investments, including retirement accounts, stocks, bonds, and mutual funds
- Real estate: your total home equity or investment properties
- Vehicles
- Collectibles, valuables, and other personal property
- Intellectual property, including patents, copyrights, trademarks, and other intellectual property assets
- Business ownership. If you already own a business, this is your share of the business's value.
What Are Examples of Liabilities?
- Mortgages
- Credit card debt
- Loans such as student loans, auto loans, personal loans, lines of credit, and business loans
- Leases and contracts, such as car leases and rental apartment contracts
- Taxes owed
- Medical bills
- Other debts
Do the Assets That Are Used to Determine Net Worth Become Collateral When Entering a Franchise Agreement?
Not necessarily. Typically, the franchisor is only interested in assessing your financial capability to invest in the business and its success. That said, every franchise agreement is different, and there may be instances when certain assets are used as collateral. Be sure to work with a lawyer or franchise consultant to review the entire agreement to understand your franchise opportunity.
Where Can You Find the Net Worth Requirement When Researching a Franchise?
The investment amount expected by a franchisor from a new franchisee varies by business. Some franchisors determine this figure based on the business model, while others consider metrics associated with the expenses.
There are a few ways you can find the net worth requirements for a franchise:
- Search their website. Franchises often have a section for “opportunities” or “investing.” There may also be a form or contact information so you can request more information.
- Speak with a franchisor’s representative or a broker. These individuals can get you more information about business opportunities and outline franchise fees and other financial requirements.
- Get the Franchise Disclosure Document (FDD). The FDD is a document produced by the franchisor and given to franchisees. It contains information about financial requirements, including minimum net worth and additional financial criteria. Some states must publish these publicly and distribute them to prospects at no cost.
- Reach out to current franchisees. A conversation with an existing franchisee can help you learn more about the startup costs for owning a franchise, and they may also share perspectives on working with the franchisor, highlight operational challenges, and help prospective franchisees with a business plan.
To learn more about franchising, visit BizBuySell’s Franchise Learning Center. To discover available franchise opportunities, including their net worth requirements, search BizBuySell’s Franchise Directory.