How Do I Know I Have Enough Money to Invest in a Franchise?
As I work with my franchise clients, I need to know what their financial picture tells me so I can do the very best job matching my clients with the right franchise. A client’s financials are an extremely important part of this matching process.
So what financial information do I look for as a franchise expert? This article outlines questions my clients have, and how I assess their financial information. It may be useful for anyone in the early stages of franchise research.
As a franchise consultant, what do I look for when reviewing a client’s financial information?
First, my clients provide financials to me through my exclusive personal franchise assessment that they complete online. When I receive their confidential results, I take a close look at the financial picture because it’s such an important part of finding the right business for a client. What I look for in this assessment is the client’s overall net worth. I look at their listed assets and their listed liabilities. Net worth is calculated by subtracting the liability column from the asset column.
Why is a client’s net worth so important to a franchisor?
What many people don’t realize is that all franchisors have a minimum net worth requirement. Franchisors know what franchisees go through to get financing, and how much money it takes to get through the early lean times in a business lifecycle. Franchisors set a minimum net worth based on what they know about their business. They are looking for qualified investors, based on net worth. From my perspective as a franchise consultant, the net worth determines which franchises I can reasonably show a client.
What is liquid capital and why is it also important?
Franchisors also have a minimum liquid capital requirement (money candidates can get their hands on without too much hassle). Franchisors need to make sure that candidates can tap into a certain amount of money quickly to pay the initial franchise license fee and other upfront costs. As with any large investment, clients must bring money to the table. They should also be well capitalized after that to get the remaining funds through traditional financing such as loans or retirement rollovers.
What does a client’s net worth say about their ability to invest in a franchise?
Here is a breakdown of what a client’s net worth tells me about them and their ability to invest in a franchise:
- Less than $100,000 – Clients in this category will likely not be able to invest in a franchise right now. They just don’t have the financial wherewithal to buy any business, but this can change over time. There are very few franchisors that will work with people who have a net worth of less than $100,000, and I simply don’t advise my clients to go “all in” with everything they have.
- $100,000 to $300,000 – A net worth that falls in this range means a client can investigate low investment franchises under $100,000 total initial investment (learn what is included in the average initial investment for a franchise). Choices are limited at this stage, but I can still find some great franchises in this category. This will pretty much eliminate household name franchises that might come to mind when people think of franchising.
- $300,000 to $500,000 – In this category I would find concepts in the $125,000 to $175,000 total investment range. This is affordable and comfortable for these clients.
- $500,000 to $750,000 – This is where clients get a lot more franchise choices. They can research concepts starting at $200,000. These types of franchise investments may have capital equipment which can be attractive to lenders because they can collateralize the equipment.
- $750,000 to $1 million – Any net worth above $750,000 gives clients a lot of freedom to choose franchises and creative financing options.
- Greater than $1 million – Clients in this net worth range have the option to play a different game. They can invest in most any franchise in my inventory, and may consider multiple units, or master opportunities for states or larger territories.
If a client has a large net worth, do I only show larger investments?
What a client can afford, and what they want to afford are two different things. Just because a client has a high net worth does not mean he or she wants to buy an entire territory or multiple units. It’s important for me to understand a client’s vision to show them the right franchise concepts for them. And, there is no correlation between the investment and the profit potential—you don’t have to invest a lot to have a successful, profitable business.
What if a client doesn’t want to share financials up front?
People are sensitive about their financials, but the reality is, the franchisor needs this information to know what a candidate can afford. No one would look for a house without telling a Realtor or a lender about their financial situation. In many cases, a franchise investment could cost more than a home. It’s my job to help my clients understand the importance of the financials before they start looking for a business, and that involves getting financial information early on. This allows me, franchisors and lenders to speak with candidates candidly and honestly.
What if a client’s net worth doesn’t meet a minimum requirement?
If a client’s net worth falls below the $100,000 mark, or if they don’t have access to liquid capital, then we have an honest conversation. I will ask about other sources of income and any other assets. Is absolutely everything included? What about retirement accounts? Sometimes my clients won’t list retirement accounts in their financials because they think that they can’t use those accounts. In fact, they can use their retirement assets in certain situations. What about equity they may have in their house or vacation homes? What about stocks, bonds, or other investments?
Even if clients don’t want to use retirement accounts, homes or stocks for funding their business, I tell them to list those assets to boost their net worth to give them more franchise options.
Do my clients go “all in” most of the time?
Keep in mind, it is not in a client’s best interest to invest everything they have in a franchise. My job is to help clients boost their net worth to have more franchise choices. This doesn’t mean putting every penny into a business.
Is a business truly a risk for my clients?
Investing in any business is risk for reward, but by doing research upfront, a client can take an educated risk. I want to help my clients make an investment in a good, solid, ethical way that keeps them grounded, and to mitigate risk as much as possible.