You've probably heard more than once that franchise...
As you search for the ideal Canadian franchise opportunity, you've likely seen the requirements for becoming a franchisee, and one that stands out is your net worth. This figure is one of the primary financial indicators that you must understand and provide to the franchisor when you apply to join their system. Each franchisor will likely have a minimum net worth requirement for prospective franchisees. The figure required will vary by franchise, but it's a crucial piece of information when entering the franchise world.
How is net worth calculated?
In short, your net worth is what you have on hand to use for any cash flow purposes. To calculate yours, list all your retirement accounts, cash accounts, properties, investments, savings and other financial assets. Next, list all of your debts and liabilities, including student loans, credit card debts, car loans, personal loans and mortgages.
Once you have all of that, add each set of lists together. When you subtract all your liabilities from all of your assets, that resulting figure is your net worth.
What does net worth matter to franchisors?
Net worth actually matters to you and the franchisor. You will use yours to get financing for your new franchise, and it also shows you how well you're controlling your own finances. To franchisors, it shows whether you have enough capital to be successful if you open a franchise with them.
Your net worth is often part of the process to qualify as a franchisee. This number signals to the franchisor how likely you are to be successful as you will need enough capital to handle your personal bills and living costs and cover your business until it begins to turn a profit.
How much net worth is required by a franchisor?
The amount of net worth a franchisor requires franchisees to have will depend on the brand and its industry. A franchise that is going to have serious payroll responsibilities or equipment costs, for example, will often require a higher net worth than a home-based franchise that doesn't involve hiring a lot of staff right away or large equipment purchases.
Generally, if your net worth doesn't meet the requirements of a franchise you want to join, you're unlikely to be successful in your franchise application. This, however, doesn't mean you can't own a franchise. You can work to increase your net worth until it reaches the level needed or search for opportunities in franchises with lower net worth requirements. Given how many different brands operate in Canada across various industries today, you may be able to find an opportunity that is more in line with your net worth yet still involves whatever attracted you to the system with the too-high net worth minimum.
Although the net worth requirement can be frustrating to deal with when you're looking for a franchise, remember that this protects you, too. If you were to join a franchise without the capital necessary to weather your first few years in business, your franchise could fail regardless of the work you put into it.