Calculating your net worth will be essential as you begin the search for your perfect franchise. Every franchise company in America has a minimum net worth requirement and the higher the investment, the higher the requirements will be.
Having enough money or the ability to borrow the needed funds is important. Not having enough money to open and operate a business is one of the chief reasons for business failure. Being undercapitalized can spell disaster as you embark on this journey. You may have big dreams, which is excellent, but you also must be realistic. For example, if you're looking at a concept that requires leasing commercial space, you have to be approved by a landlord. They and the franchise company will perform background and credit checks on you. Your success is on the line, and if you fail, you and the brand will be damaged. Also, the landlord will take a financial hit because you will not be paying rent.
The best franchise companies are so serious about having the proper capital to be successful that they will ask you to sign an affidavit guaranteeing that you have the money to build a business and pay your bills as you build the business.
Franchising is a symbiotic relationship. The more money you make, the more money the franchise company earns through the backend royalty system. If you fail in the business, the franchise company must list that closure for two years in the Item 20 section of their Franchise Disclosure Document. So now, every prospective franchise owner who contacts the company will see that there was a failure. Additionally, the prospect has the right to talk with you about your experience. If you had a bad experience, that would hurt the franchisor and possibly prevent or put a dent in them selling more franchises.
How to Figure Out Your Net Worth
Determining your net worth is relatively simple. On a sheet of paper, list all of your assets. You own these items outright that are worth money and are sellable. These are personal belongings that a bank can use as collateral. Examples are:
- Cash on hand in checking and savings accounts.
- 401K, IRA and retirement funds, cash value insurance policies.
- Any real estate that you own.
- Assets of a business that you own.
- Personal property such as jewelry and artwork.
- Vehicles, RV's, boats, motorcycles, planes, etc.
Then list all liabilities or debt
- Mortgages
- Credit cards
- Outstanding loans
- Car payments
Subtract these liabilities from your assets. The result is your net worth.
About Calculating Real Estate
A quick valuation of your home is an excellent place to start your net worth calculation.
Find out the value of your home on websites such as Zillow.com.
As an example, let's say your home is worth $400,000. When you purchased the house, you needed to put 20 percent of the price down as a down payment. In this case, it would be $80,000. That means you have a $320,000 mortgage or loan on your home. But you don't have any equity or value to take a loan against the house because the bank actually owns it at this point.
However, as an example, if you have paid off $100,000 of that Mortgage since you purchased the home, you would have $220,000 left on the loan giving you $180,000 in potential equity value in the property.
$400,000 = Home Value
-$220,000 Mortgage Balance (Because you've paid $100,000 down)
$180,000 equity in your home.
So, in your net worth calculation, your home is worth $180,000 in cash to you right now.
If you want to use that money via a home equity line of credit loan, the bank will give you a check for 80 percent of the value of your home, minus the Mortgage.
Here's the math:
$400,000 Home Value
-$220,000 is the Mortgage left on the home
$180,000 = the value or equity in the property
-$36,000 Subtracted 20 percent of the equity in the home
-$144,000 = the equity you can take out of your home and use for buying a business or whatever else you'd like.
Also, Home Equity loans are usually lines of credit, also known as HELOC. So, you would get a line of credit for $144,000, minus fees and taxes. That $144,000, or home equity line of credit, is available to you as you need it. You're only making a monthly on the money you use from the line of credit.
In addition to a net worth requirement when buying a franchise, there is usually a minimum liquidity requirement as well.
Liquidity is the money you can get access to if you need it.
As in the home example from above, although your home is worth $400,000 today and you paid down your Mortgage by $100,000, if you sold it, you'd walk away with about $180,000. So your liquidity is $180,000 from that home.
An excellent point to understand here is that you used $80,000 of your own cash as a down payment to buy a home. After some years, you can sell the house and keep around $180,000 or more if the home increases in value. That is a $100,000 profit in five to ten years. Not bad. It's better than keeping the money in the bank for less than one percent interest, plus you had a place to live all this time.
Please note that it may be challenging to find financing if you have a bankruptcy in your past. Also, some franchise companies will decline you as a potential franchise owner if you've previously had financial difficulties.
Of course, you will most likely not be granted a franchise if you have a criminal record.
My advice is to figure out your financing vehicle sooner than later. It will probably take longer to get a loan than to decide on a franchise.
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