Franchise business opportunities often have a net worth requirement. This number is separate from the amount of cash you must come up with for your franchise investment.The object is to make sure that the potential franchisee is not just scraping together every penny to invest, but will actually have the financial resources to get the doors open and survive the lean times while the franchise is growing.
Franchisors want their franchisees to succeed, and insufficient capital is one of the top reasons that new businesses fail. Requiring a specific net worth increases the chances of success.
So how can you get an accurate statement of your net worth?
Begin by listing your assets:
- Cash on hand and in bank accounts
- Money in CDs, retirement accounts, and money market accounts
- Investments such as stocks and bonds
- The market value of your house and any other real estate you own
- The actual market value of any other items you could and would sell if necessary, such as works of art, cars, boats, jewelry, and any other item which could be liquidated for significant funds
The last group is only relevant if you would be willing to liquidate the items, and if they have significant value. Diamond tiaras, in other words, not your wedding ring. You can’t assume that your assets are worth the amount you paid for them; they could have either a higher or a lower value now than they did when you bought them. You can get good estimates of the value of your property by using current guides like the Kelley Blue Book for cars, by finding recent sales of similar property, or by hiring a professional appraiser.
You should not include an expected inheritance. Circumstances may change between now and when your benefactor dies, and there may be more or less money than expected, or you may not be the heir. People live longer now than they used to and may spend more of their money than they planned, or they may surprise everyone with a new marriage late in life or a decision to support a charity.
The next step is to list your liabilities: in other words, your debts. These might include mortgages, loans, and credit card balances. While some of your assets might be estimates, your liabilities should be exact numbers.
Subtract your liabilities from your assets and you’ll have your net worth.
You don’t need to share information about your income and expenses with a franchisor, but you should consider that information yourself. The franchisor’s net worth requirement is based on the experience of other franchisees. But if you take a close look at your finances and find that you are spending right up to the edge of your income, you may find the transition from employee to business owner more challenging than if you’re frugal.
On the other hand, you may need to make the leap so you have more control over your income.
Make these calculations before you get your heart set on a specific business opportunity so you can head into your purchase with confidence.