There is no point in looking at franchises that have financial requirements that far exceed your financial position. In other words, when considering a franchise, it is important to focus on those that match your financial position and comfort level. Don’t assume you can do it for less than what a franchisor outlines in their Franchise Disclosure Document Item 7 Estimated Total Investment. After all, one of the most common reasons for new business failure is lack of capital.
In order to know whether you meet the financial requirements of a franchisor, it is important to understand some commonly used terms in the industry--Total Investment, Liquidity, and Net Worth.
- Total investment is the amount of money needed to get a franchise up and running. Total investment is a range that includes all money spent from day 1 through 3-12 months of active business operations. And yes, the total investment should include several months of working capital to get you to cash flow breakeven. Each franchisor provides a detailed total investment table in their Franchise Disclosure Document Item 7.
- Liquidity is your cash position plus other assets that can easily be converted to cash (i.e. stocks, bonds, extra car, retirement funds).
- Net Worth is your total assets minus your total liabilities.
In most cases, 60% of the total investment can be financed and the other 40%—what you need to come up with—is referred to as liquidity. Net worth requirements tend to be 150% of the total investment. Following are some basic examples:
Example 1: Total Investment $150,000, Liquidity $60,000, Net Worth $225,000
Example 2: Total Investment $250,000, Liquidity $90,000, Net Worth $375,000
The best franchise opportunities require liquidity starting at $60K+ and a net worth of $200K+. Be careful with franchisor’s that require less, they tend to underestimate the total investment requirements in order to attract new franchisees.
Although the total investment of getting into a franchise may seem high, it also costs money to start your own business. One of the advantages of choosing a franchise is that franchisors provide you with an accurate picture of what it will cost to start the franchise and your ongoing expenses. This is valuable information to have when you start a business.
There are many funding options available including use of retirement funds, SBA loans, equipment financing, home equity loans, demand financing, etc. Many people are surprised to find out that they can get funded. Want to learn more about your funding options? Simply contact me and I will put you in touch with the best professionals in this space. And, best of all, they will provide you with a free consultation that will outline your options for free.
