It's essential to understand your net worth because every franchise company in America has a minimum net worth requirement. Obviously, the higher the investment, the higher the requirements.
Not having enough money to open and operate a business is one of the chief reasons for business failure. You do not want to be undercapitalized for this endeavor. You may have big dreams, and that is great, but you need to be realistic. Also, 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, in addition to the landlord taking a financial hit because you will not be paying rent.
Some 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 go.
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 is required to 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 will 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. These are items that you own outright that are worth money and are sellable. Things that a bank can use as collateral.
This will be cash on hand in checking and savings accounts.
401K, IRA and retirement funds, cash value insurance policies.
Any real estate that you own.
Any personal property such as jewelry and artwork.
Vehicles, RV's, boats, motorcycles, etc.
Then list all liabilities or debt.
Mortgages
Credit cards
Outstanding loans
Car payments
Subtract these liabilities from your assets, and 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 a website 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 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.
However, as an example, if you have paid off $100,000 of that mortgage since you purchased the home, you have $300,000 potential equity value in the property.
$400,000
-$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 - Mortgage left on the home
$180,000
-$36,000 - 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 Equality loans are usually lines of credit. Aka HELOC. So you would get a line of credit for $144,000 Minus fees and taxes. The line of credit is available, sort of like a credit card. You will only have to make a payment on the amount that you use.
When buying a franchise, in addition to a net worth requirement, 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.
A good point to make here is that you used $80,000 to make the investment of buying 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. A lot better than keeping in the bank for 1 percent interest, plus you had a place to live all this time.
This is a good place to mention 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 had financial difficulties in the past.
Of course, if you have a criminal record, you most likely will not be granted a franchise.
My advice is to figure out your financing vehicle sooner than later. It will probably take longer to get a loan than to make a final decision on a franchise.
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