When you start searching for a franchise to own, you’ll want to have a good understanding of your financial qualifications. The first place franchisors look is at someone’s net worth. This blog post explains what net worth is and why you should know yours.

How to Calculate Your Net Worth

It involves nothing more than addition and subtraction. Start with your assets. Write them down and indicate the value of each. Assets include cash, savings, and Certificates of Deposit (CDs). They also include valuable personal property, stock market investments, retirement funds, and real estate holdings.

Then list your liabilities. Include the outstanding balances of anything you owe. Common liabilities include credit card debt, student loans, automobile loans, and mortgages. Subtract the total amount of the liabilities from the total amount of the assets. The resulting number is your net worth.

Why Franchisors Care About Net Worth

Net worth is a quick way for a franchisor to assess your financial qualifications. It speaks to how well you manage money. A listing of your assets and liabilities lets them assess your liquidity or how much cash or cash equivalents you have. Assuming you have good credit, It lets them know if you have the ability to provide collateral for an SBA loan. If you have retirement monies, you have the option to use those funds to capitalize your business without incurring taxes and penalties.

What Net Worth Do You Need?

Franchisors have minimum financial qualifications for liquidity and net worth. The amounts for them will depend on each franchisor and the business model of their brand. For example, a home-based services franchise will have lower liquidity and net worth requirements than a brick and mortar retail franchise because the upfront costs and the monthly operating expenses are lower.

For example, a popular home-based handyman services franchise requires liquidity of $100,000 and a net worth of $250,000. On the other hand, a rapidly growing boutique fitness franchise requires liquidity of $100,000 and a net worth of $500,000. To be expected, the fitness franchise has a higher net worth requirement because the investment level and operating costs are higher than a home-based business.

Who Has $100,000 Lying Around?

Very few people do. A common source of liquidity for homeowners is a Home Equity Line of Credit or HELOC. People also have savings, CDs, stock market, and retirement fund investments that can quickly be converted into cash. Note that there is a specific process to withdraw retirement monies without incurring taxes or penalties.