Budget is one of the most important things to consider if you’re looking to invest in a franchise. Every franchise system has its own franchise fee and startup costs, and not all will match your financial situation. But beyond how much you’re willing to spend to launch a franchise, you also need to consider whether you meet the financial requirements put forth by the franchisor.
Common financial requirements for franchise investment
Franchises may use different terms to describe the finances required to invest in their businesses. You’ll need to understand the differences between them in order to determine whether or not you’re a good fit for the system.
Here are some of the most common financial requirements set by franchises.
- Franchise fee: The franchise fee is the license or cost of entry into a franchisor’s business model. Typically, the franchise fee offsets the cost of training, ongoing support, R&D, proprietary systems and labor related to getting you set up in the system. Franchise fees are flat, one-time costs that do not change based on your market, but they do differ from franchise to franchise.
- Startup costs: Startup costs include all the costs associated with launching your business. These costs will differ based on the business and what you need to run it, potentially including real estate, insurance, supplies, equipment, etc. Startup costs are typically presented as a range, with a low and high number to estimate the total you’ll need to get started.
- Liquid capital: Liquid capital refers to the total amount of cash or other easily converted assets you’ll need on hand in order to enter the franchise contract. It is not the same thing as the startup cost total, although it’s often included in the total investment breakdown. Liquid capital is required to be able to infuse your business with cash as needed, particularly as you grow your new business to profitability.
- Net worth: Many franchises set a net worth requirement as way to prove that you’re financially fit enough to bear the risk of business ownership. Your net worth does not only include cash or liquid assets. Net worth refers to your total assets minus your total liabilities, meaning it includes things like your home and retirements accounts. This is not an amount you’ll have to pay; you just need to meet the minimum net worth requirement.
- Credit score: Some franchises may also verify that your credit score is above a certain limit and your credit history is solid before you can invest. Good credit is necessary to obtain financing for your business, both upfront and down the road. It’s also a reflection of how responsible you’ve been with debts and how financially stable you currently are.
In addition to these upfront financial requirements, a franchisee might encounter additional fees after launching the business. These might include ongoing marketing fees as well as royalties, which are related to the amount of revenue your business makes.
All of the costs, fees and requirements for a given franchise will be detailed in their Franchise Disclosure Document (FDD), per FTC regulations. This will give you a more comprehensive look at what costs you should expect upon signing a franchise agreement.
Explore a multitude of franchise opportunities
Financial requirements can vary wildly from franchise to franchise. If you don’t meet the requirements for one system, you might meet them for another!
Tenet Financial Group maintains strong relationships with some of the nation’s top franchisors as well as franchise consultants. We help aspiring entrepreneurs find a franchise system that works for them, then we pair them with small business funding to get them off the ground. Contact us today to learn more!