Posted on Jan 06, 2011
Prospective Franchisees - The Financial Questionnaire
As part of their franchisee qualifying process, the majority of well-managed franchise systems conduct thorough background checks of potential franchisees. This standard screening process analyzes an applicant's financial resources, education and work experience, and character traits, typically through a series of questionnaires and interviews.
The first qualification considered and investigated is often the prospect's financial situation, so as a franchise applicant you will need to be familiar with the financial jargon that a franchisor may employ in their questionnaire.
Assets are typically classified as either short-term assets or long-term assets.
Short-term assets include liquid capital, such as cash (funds sitting in your checking and savings accounts), readily sold investments (e.g., any stocks, bonds, or other securities for which there exists a liquid market), and any other assets, like the cash value of your life insurance policy, that can be liquidated on very short notice.
Long-term assets include your holdings that have value but cannot be immediately converted to cash. Examples include long-term holdings in the bank (e.g., certificates of deposit), the value of your home or other real estate holdings, the value of your long-term retirement accounts (e.g., your 401K), the value of your own business, any illiquid equity investments you may have (e.g., your investment in a friend's private business), any notes receivable you hold, and the value of certain other tangible assets (e.g., your automobile).
Liabilities include loans and notes payable, including real estate mortgages, student loans, auto loans, credit card debt, charge accounts, loans against your life insurance policy, and all other indebtedness you may be carrying.
To calculate net worth, subtract your total liabilities from your total assets. This figure provides the franchisor with a good snapshot of your relative financial stability. Consideration is also given to the components that comprise your assets and liabilities - for example, if your total net worth is tied up in speculative real estate holdings, that will likely raise red flags.
Sources of Income
Sources of income can include your salary, annual bonuses, and commissions, as well as income from dividends and interest, real estate income, and other sources.
As a complement to the questionnaire, the franchisor will often require a credit check and copies of bank statements, paystubs, tax filings or other evidence to confirm the veracity of your financial claims.
Quality franchisors are interested in more than whether the applicant can simply afford the initial franchise fee. They're concerned with the applicant's potential for long-term viability and success within their franchise system. Thus, in addition to the financial items outlined above, as part of the initial screening process an applicant can expect to receive questions that explore their educational background, their previous places of employment, their motivation for buying a franchise, and their understanding of the franchise model, as well as questions that pertain to their character or personality. To confirm these answers a franchisor may also request personal references.
Why do franchisors ask all these questions? Put simply, a franchise is a long-term commitment by both parties, and the franchisor wants to understand how well the applicant matches the franchisor's notion of the ideal franchisee.
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