Liquid Capital is a term we franchisors use a lot in franchising, so much so that it’s easy to forget that it's not a common word for people who are new to the industry, i.e., potential franchisees. Here's how to help them think about it.
The first type your franchisees need to know about are liquid assets. These are either cash, or can be quickly and reliably converted into cash within about 30 days.
Secondly, they must understand 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.
Liquid Capital describes how much money a candidate had immediate access to, usually in the context of their ability to invest in something new like a franchise business.
Liquid Capital includes money in their checking and basic savings accounts, and any money you have invested that you could quickly cash out.
It doesn’t include illiquid assets like the person's home, liabilities, like a mortgage or student loans, or investment accounts they don’t have immediate access to (SEP, IRA and other retirement funds).
When someone is considering making a big investment like buying a franchise, it’s important to know their liquidity. Liquid Capital Requirement is usually one of the first financial pieces of information you’ll present about your franchise opportunity.
As a franchisor, you will specify a Net Worth Requirement as well as Liquid Capital Requirement. But your candidates might not know that number already. Or, their estimate of the level of financial backing a successful new location will need isn't accurate.
You can help potential franchisees 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 recommend sitting down with them and using our Liquid Capital & Net Worth Calculator. 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.
Helping candidates understand their financial situation well will give you a big leg up in understanding which franchise opportunities are a good fit for them. Good luck!