What Is Liquid Capital for a Franchise? (+ How to Get It)
Michael Nicholas / Franchising / August 17, 2023
If you’re not already an experienced business owner, all the technical jargon may be confusing when you start evaluating potential franchise opportunities. Understanding the nuances between revenue and profit, net worth and liquid capital, or minimum cash and startup costs may not come naturally to those who don’t have a business degree. That doesn’t mean you won’t make a good franchisee. It just means you need to do a little legwork first.
In this article, we’re going to take a closer look at one of the key components in determining if a franchise opportunity will work for you – liquid capital. Understanding the concept of liquid capital, how much you need, and how to get it for your franchise is crucial to start your entrepreneurial journey. So, let’s dive into the details!
Liquid capital, often referred to as liquid assets, is any asset that can be quickly and easily converted into cash without losing its value. In regards to opening a franchise, liquid capital is essentially your ready-to-use funds that can be utilized immediately for any necessary expenses.
So, what does liquid capital mean for potential franchisees? It’s easy to confuse liquid capital with the amount due to the franchisor. While the total liquid capital required for a franchisee certainly encompasses costs to cover the franchise fee, it also extends to other startup expenses necessary to kickstart the business. These costs may include rent or real estate, training, inventory, and additional overheads.
Another common misconception among franchisees is thinking that liquid capital and net worth are the same thing. Net worth is the cumulative total of both liquid (easily convertible to cash) and illiquid assets (assets that are not readily convertible to cash). In contrast, liquid capital, as highlighted in the examples below, includes only those assets that can be swiftly converted into cash.
Understanding the difference between liquid capital and net worth is crucial when planning your franchise investment. More importantly, it helps you guarantee that you can meet the minimum liquid capital requirements of the franchise opportunity you’re interested in.
When it comes to acquiring a franchise, potential franchisees should be aware of various sources of liquid capital at their disposal. Let’s look at some of the most common examples.
At the top of the list of liquid capital examples is cash or the balance you have in your savings account. This cash can be quickly and easily used for any immediate business needs.
Stocks, bonds, and other marketable securities also qualify as liquid capital. Their value lies in their marketability – they can be sold on the stock exchange, providing a quick influx of cash when required. However, it’s important to remember that the selling price is dependent on the market conditions at the time of sale.
Mutual funds, essentially pools of diversified investments, constitute another form of liquid capital. Despite the complexity of these investments, they can typically be sold within a few business days, transforming into cash at hand.
Similar to mutual funds, money market funds are a type of investment fund. They are considered highly liquid due to their short-term nature. This allows for quick conversion to cash, further adding to your liquid capital.
While understanding what counts as liquid capital is integral to your franchise investment journey, it’s equally important to recognize non-liquid assets. Non-liquid capital refers to assets that cannot be quickly converted into cash without potentially losing value. Here are some common examples:
Properties, whether residential or commercial, fall under the category of non-liquid capital. Despite their considerable value, they can’t be quickly or easily sold without the risk of a price drop. Real estate transactions can take weeks or even months to complete, which doesn’t offer the immediate accessibility that liquid capital does.
Items like art, antiques, rare coins, or other collectibles are also considered non-liquid capital. While they may hold value, finding a buyer willing to pay that value can be a time-consuming process, making them a less optimal source of capital.
Machinery, vehicles, or other equipment related to your business or personal use are also forms of non-liquid capital. Although these assets might be highly valuable, selling them for their true worth could be challenging and time-consuming, hence their classification as non-liquid.
For individuals below retirement age, retirement accounts generally fall under non-liquid assets. Despite their substantial value, accessing these funds early can invite penalties and tax implications, making them less ideal as a source of liquid capital for a franchise investment.
Potential investors often focus on the initial franchise fee when considering buying a franchise. However, the financial aspect of owning a franchise extends far beyond this initial payment. Franchises generally set a minimum liquid capital requirement for potential franchisees. This ensures that they possess the requisite financial backing, not just for the initial purchase but also to sustain the franchise until it becomes profitable.
The term “liquid capital” might vary in definition across franchises. Some may have a more expansive interpretation of what assets count as liquid, while others might be more restrictive. It’s essential to thoroughly understand and align with the specific definitions set by the franchise you’re considering by reading over the Franchise Disclosure Document.
Beyond the initial investment, franchises come with various startup costs, from leasing space and acquiring inventory to training staff and launching marketing initiatives. Furthermore, achieving profitability in a new business doesn’t happen overnight. There might be a period where expenses surpass revenue, especially in the initial stages. During such times, liquid capital acts as a financial safety net, ensuring the business can continue its operations uninterrupted. It provides the franchisee with a buffer to navigate early challenges, making it a crucial aspect of the franchising journey.
In general, most franchises will have a minimum requirement of $50,000 in liquid assets. However, some demand much more. For instance, the P3 Cost Analysts franchise has a relatively low cash minimum of $59,500. Meanwhile, other franchise opportunities will differ. KFC, for example, requires potential franchisees to have $750,000 in liquid assets.
However, it’s essential to ensure that diving into a franchise doesn’t put you in a bad spot financially. Maintaining a cushion for personal expenses and unforeseen business challenges is crucial. Though thorough research and due diligence can help in selecting a promising franchise, there’s an inherent risk in starting a business. Therefore, it’s wise to ensure you have enough liquid capital in reserve to pay personal bills and expenses during the initial phases when profitability might not be immediate.
Whether you are planning to buy a franchise or are just starting your research, you might be wondering, “How do you get liquid capital for a franchise?” If your money isn’t easily accessible in your savings accounts, you may have convertible assets that can add to your total available. Here are a few options to consider:
This is the most straightforward way to accumulate liquid capital. By saving a portion of your income over time, you can build up your liquid capital reserves without borrowing or selling assets.
If you have personal assets such as valuable collectibles or equipment, you could sell these to generate liquid capital. However, this should be done with caution as it could have tax implications and also reduce your net worth.
Tapping into your home’s equity through a HELOC can provide ready funds. As you repay your mortgage and your property’s value increases, you accumulate equity, which can be borrowed against for liquid capital. This option often has lower interest rates than other loans, but remember, your home serves as the collateral. If you can’t pay back the loan, you risk losing your property.
In some cases, you might have family members or friends willing to invest in your franchise business. However, this option should be approached carefully to avoid any future disagreements or strained relationships.
How does liquid capital work?
Liquid capital refers to assets that can be quickly and easily converted into cash without significant loss in value. In the context of business, it represents readily available funds that can be used to cover immediate and short-term needs, such as payroll, rent, and inventory.
How do you get liquid capital for a franchise?
Two common ways to gather liquid capital for a franchise include tapping into personal savings or selling personal assets, such as stocks, collectibles, or valuable equipment.
Is a 401k considered liquid capital?
While a 401k holds value and can be accessed, it’s not typically classified as liquid capital because withdrawing funds early can result in penalties and tax consequences. However, using strategies like Rollover for Business Startups (ROBS), individuals can tap into their 401k to finance a franchise without penalties.
Is a loan considered liquid capital?
Some franchisors do not regard borrowed money as liquid capital. This is because loans come with the obligation of repayment, which can impact the financial stability of the franchisee.
Is a house a liquid asset?
Generally, a house is a non-liquid asset. Selling it to convert it into cash can be time-consuming and depends on current market conditions.
How to get liquid capital for a franchise?
Acquiring liquid assets can be done by building up personal savings over time or by selling personal assets like stocks or collectibles.
Choosing franchises with minimal buy-in requirements, such as P3 Cost Analysts, can ease financial pressures. With reasonable franchise costs, startup expenses, and overheads, it’s a financially accessible venture that still allows for a healthy ROI.
Yet, low startup costs do not imply a lack of support. At P3, affordability and support go hand in hand. Each franchisee is equipped with comprehensive tools, training, and resources to ensure their success. The balance of low initial investment and a robust backing system positions P3 Cost Analysts as a high-value, low-barrier entry into the world of franchising.
Navigating the world of franchising can be complex, but understanding your financial footing is crucial. Liquid capital plays an essential role in determining your readiness and capability to dive into franchise ownership. By comprehending what constitutes liquid capital, its importance, and ways to acquire it, you’re better positioned to make informed decisions.
For those seeking a low-barrier entry with substantial support, franchises like P3 Cost Analysts present a promising avenue to explore. If you’re ready to take the first step, contact us today by filling out the form on our franchising page.
