Liquid Capital & Net Worth: Why These Metrics Matter In Franchising (And How to Calculate Them!)
Liquid Capital is a term we use a lot in franchising, so much so that it’s easy to forget that this isn’t really a common word for folks who are new to the industry (hi, potential franchisees!)
Let’s put our finance caps on and talk a little about what Liquid Capital is, how to think about it, and its relationship to Net Worth.
Starting with these two definitions:
- Liquid Assets: Assets that either are cash, or can be quickly and reliably converted into cash within about 30 days.
- Illiquid Assets: Assets you don’t have immediate access to, or whose value isn’t clearly defined.
For instance, a house has an estimated market value, but since it would take significant time to find a buyer for the home and you can’t reliably predict the purchase price, homes are considered to be an illiquid asset.
This brings us to Liquid Capital, a term used to describe how much money you have immediate access to, usually in the context of your ability to invest in something new like a franchise business.
Liquid Capital includes:
- Money in your checking and basic savings accounts
- Any money you have invested that you could quickly cash out.
It doesn’t include illiquid assets like:
- Your home
- Liabilities, like a mortgage or student loans.
- Investment accounts you don’t have immediate access to (retirement accounts)
When considering making a big investment like buying a franchise, it’s important to know your liquidity. Liquid Capital Requirement is usually one of the first financial pieces of information you’ll see about a franchise opportunity.
When a franchise says it requires $X Liquid Capital, what does that mean?
This is the franchise’s best estimate of how much cash you should have on hand in order to successfully start your business. It’s not the amount of money you’ll pay to the franchisor (that would be the Franchise Fee). Generally the liquid capital accounts for the franchise fee, your startup and training costs, any expected real estate costs, and some amount for operating expenses during the ramp up before your location becomes profitable.
It’s worth keeping in mind that most franchisors expect new franchisees to take some amount of financing on top of their own capital investment. Generally they expect that an individual with the amount of capital listed will be able to obtain an appropriate amount of financing to cover all the necessary business expenses. You should have a conversation with any potential franchisor about what to expect your liquid capital investment to cover, and what you should expect to need to cover with financing.
What about Net Worth?
Most franchisors will specify a Net Worth Requirement as well as Liquid Capital Requirement, so you can understand the financial position you need to be in to open a location successfully. Again, this number is not anything you need to pay to the franchisor directly. It’s their estimate of the level of financial backing a successful new location will need.
Net Worth includes the value of all your assets, liquid or illiquid, less the balance of all your liabilities. Whereas Liquid Capital includes only a few types of assets, net worth includes everything attached to you financially. If you own it, it’s part of your net worth. On the flip side, everything you owe is also included, so it is possible to have a negative net worth if an individual has debt greater than their assets.
How can I calculate my Liquid Capital and Net Worth?
You can calculate both of these numbers pretty easily by tallying up all your assets and liabilities, and determining which assets are liquid and which illiquid. We’ve also created an online calculator you can use that will calculate them for you:
With this calculator you’ll be able to determine your current financial position, which will help you understand how much you can afford to spend on a franchise and estimate how much funding you may qualify for.
Understanding your financial situation well will give you a big leg up in understanding which franchise opportunities are a good fit for you, or what else you may need to do before investing.
Have questions about financing, or opening a franchise? Contact us!
Anna Flowers is the President of FranchiseHelp. After working in franchising for the past 84 years, her net worth is mathematically incalculable.
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