“Net worth is a quantitative concept that measures the value of an entity and…provides a snapshot of an entity’s current financial position” (Investopedia).
Are you interested in owning your own business? Whether you plan to buy a franchise or start your own business from scratch, it’s essential to set yourself up financially to succeed. In fact, in addition to requiring a minimum amount of liquid capital, most franchises have a pre-established net worth requirement.
Frequently Asked Questions
Understanding the concept of net worth is foundational to buying a franchise. Not only is it a prerequisite, but it helps indicate whether or not you are financially prepared to start a business. While determining your net worth isn’t complicated, some might have questions about why their net worth is so important and what they can do to increase it.
How is Net Worth Calculated?
You can use the following formula to calculate your net worth:
On-hand cash + all assets (liquid and non-liquid) – current liabilities = total net worth
The amount of net worth a franchise required will vary widely and largely depend on the projected capital needed to successfully start a new location. Knowing your net worth can help you narrow down which franchises to consider based on their requirements.
Why Do Franchisors Look at Net Worth?
In short, a business owner needs to have enough capital to sustain the business until it is self-sufficient. A franchise requires a minimum amount of net worth to ensure the franchisee can do this. If a franchise location succeeds, then both parties will benefit.
A few more specific reasons a franchisor wants to see a certain amount of net worth include:
- Capital Requirements – The minimum net worth requirement will vary with each franchise. For example, the franchisee might need to invest in heavy equipment or have a larger payroll to manage, which will require more capital in the beginning until the business can support itself. In this case, the required net worth will likely be higher than it is for a franchise with low overhead costs and a minimal upfront investment.
- Money Management – Having a certain amount of net worth is a good indicator of an individual’s ability to manage their money. While it doesn’t guarantee success, it does increase the chances of it.
- Business Experience – High net worth is often achieved through various successful endeavors. If someone meets the minimum net worth requirements to purchase a franchise, it often means they’re bringing valuable business experience to the table.
What if You Have Low Net Worth?
If you have a low or negative net worth, then you should work to increase it before starting a business. Here are some basic steps you can take to improve your net worth:
- Pay off your debt
- Consolidate your loans
- Make smart investments
- Increase your retirement contributions
- Reduce your expenses
- Increase your assets
- Reduce your liabilities
Net worth requirements can be frustrating for those with little savings, but it’s worth taking the necessary steps to build it. Ultimately, having sufficient net worth can protect you from experiencing the consequences of a failed business.
Check out the following blogs for more information related to preparing yourself financially to buy a franchise:
Speak With An Experienced Franchise Consultant
If you’re interested in franchise ownership, a FranNet franchise consultant can help you determine your net worth as well as the various funding options available for purchasing a franchise. We will also help match you with the right franchise opportunity and provide you with the guidance and resources you need every step of the way. Reach out today to schedule your free consultation!