BY BILL BRADLEY, Founder/CEO, America’s Best Franchises
January 31, 2013
Almost every franchise has a net worth requirement for franchisees. Before being considered for the franchise investment, you might have to prove that you have a net worth of $100,000 or some other amount. Some large franchises require even larger net worth — into the range of $300,000 or more.
This can be frustrating for some franchisees. You have enough to buy in, and you plan to invest in order to make more, right? Why should you have to prove your net worth first?
The most obvious reason for net worth requirements is to ensure that the franchisee has the financial health to open a franchise. Parent companies know that it can take time to make money, and they don’t want you to be limited by a lack of capital.
Another– not as obvious– reason is to protect you, the franchisee. If you open a franchise and it fails, costs can really add up quickly.
Reasons why Franchisors look at net worth:
Money Management Skills
Being financially solvent and having liquid assets in excess of a certain amount shows a franchisor that you know how to manage your own money. While it doesn’t necessarily mean you know how to manage other people’s money, franchisors assume you will treat the franchise as you do all your other assets. People who can manage their own money well have a higher chance of success than people who have low liquid assets or who have declared bankruptcy a number of times.
Franchisors care a lot about potential markets. If your neighborhood contains some people with a net worth of a certain amount, the likelihood is that there are other potential customers of a similar level of net worth. These are the markets where the parent company feels they’ll do well.
When franchisors require exceptionally high net worth, it is because they expect you to have made money through other enterprises. They are looking for franchisees with experience operating a business rather than inexperienced individuals.
What Franchisees should look for:
Appropriate Net Worth Requirements
Very low net worth requirements can mean that a franchise is willing to accept a lot of franchisees, knowing that not all will succeed. If you can meet a higher net worth requirement, you might be better off with a more demanding parent company. If you know that you have the personal characteristics to succeed, even without much net worth, you can choose a company with lower requirements.
You can often buy an existing franchise and avoid net worth requirements altogether. This can mean that you have a business that’s ready to run from day one. Of course, it can also mean that you have a business that has already made mistakes. Look closely at this option before you invest.
If net worth minimums are a problem for you, you can partner with other investors who have more liquid assets than you do. You might be able to provide more of the work and let your partners benefit by letting their money work for the business.
As with any decision concerning your investment in a franchise business opportunity, you can make the best decision when you fully understand the opportunities. Use our simple Franchise Bulls Eye search tool to find the right franchise opportunity for you.