What Is Liquid Capital for Franchises?
Owning a franchise requires owners to have a solid understanding of investments and assets. Access to liquid capital is key to helping a franchisee launch and grow a business. Franchisors often require a specific amount of liquid capital, which sets franchisees up for success and guarantees they have the funds to cover the expenses that come with franchising.
What Is Liquid Capital?
The term liquid capital is used to define assets that have “liquidity,” which can easily be converted to cash in hand. Prospective franchisees must meet specific liquid capital requirement before they can sign an agreement with franchisors.
With this access to capital, these prospective franchisees illustrate to franchisors that they can cover capital expenditures, manage unexpected expenses, and maintain streamlined day-to-day operational processes without borrowing money or using a line of credit.
Examples of liquid capital includes:
- Cash
- Checking and savings bank balances
- Stocks, marketable securities, mutual funds
- Short-term investments, such as short-term bonds
Non-liquid capital, unlike its counterpart, cannot be readily converted into cash. These assets have barriers to access or may be more likely to incur a loss in value. For example, real estate is an illiquid asset because the property’s sale price might vary based on market conditions. Plus, the closing process takes time. You might not be able to access the cash in your asset for months.
Similar to real estate, retirement account investments are not considered liquid due to penalties and market value fluctuations. Furthermore, equipment used for business purposes is also considered a non-liquid asset. While the equipment has some value, it quickly depreciates.
What Is the Difference Between Liquid Capital and Net Worth?
While liquid capital refers to assets on hand that can easily be used to cover expenses, net worth looks at the bigger picture. Net worth considers all assets and liabilities, including long-term investments and illiquid assets, to calculate the total worth of a prospective franchisee. Net worth also factors in debts that must be repaid, including credit card debt, small business administration (SBA) loans, and mortgages.
Why Do Franchises Require a Minimum to Enter into an Agreement?
Franchisors aren’t likely to entrust any entrepreneur with an established brand. To be considered for a new franchise, a franchisee must show proof of an initial investment to cover expenses and demonstrate commitment to the venture.
Franchised businesses must adhere to a specific set of shared goals. The initial investment when starting a new franchise or buying a franchise resale covers everything from franchise fees and lease payments to construction costs and utility deposits. Once the business is up and running, there are additional costs associated with franchising, like adopting a cohesive brand image to purchasing uniforms and setting a high bar for quality customer service, a new franchise owner must be prepared to invest in implementation and training to meet the expectations set by the franchise agreement.
Furthermore, a franchise owner must have an eye on long-term growth strategies. Successful franchisees may go on to open and manage multiple franchises, furthering their commitment to the franchisor and its brand.
Where Can You Find the Liquid Capital Requirement When Researching a Franchise?
The level of investment that a franchisor requires from a new franchisee can vary by many factors. Some franchisors may choose a figure based on the business model, while others use metrics related to opening and operating costs.
To determine the liquid capital requirements for a franchise:
- Check the website. There may be more information published in a section on franchising opportunities or investing. You may also be able to request brochures and materials to gain more knowledge.
- Check the Franchise Disclosure Document (FDD). A Franchise Disclosure Document is provided to franchisees by the franchisor. The FDD is a required legal document that includes information such as initial investments and financial requirements. Some states allow you to download these documents for free.
- Speak with a franchise consultant or a broker. Franchise brokers and consultants can provide more detail about the franchise fee and other financial requirements.
- Speak with current franchisees. Firsthand feedback from an existing franchisee can open your eyes to the total investments related to opening a franchise. They may also be willing to help potential franchisees by sharing perspectives, challenges, and perceived opportunities for opening a new business.
To learn more about franchising, visit BizBuySell’s Franchise Learning Center. To find franchise opportunities for sale—and their liquid capital requirements—search BizBuySell’s Franchise Directory