Franchise Requirements: How to Qualify for Franchise Ownership

If you’ve got that entrepreneurial spirit and you want to apply for franchise ownership, understand that there are some franchise requirements you must fulfill to pass muster. Keep in mind, different franchises are looking for distinctive qualities that are best suited for their brand. But there is an overall standard of franchise qualifications you must adhere to. Requirements to start a franchise are in place to determine eligibility. If you don’t meet standard qualifications, you won’t be considered as a viable candidate for a franchise. 

Qualifying for a Franchise Award

There are many requirements a franchise brand looks for in a franchisee candidate: They delve into your experience and skill level. They want to get to know you as a person. They want to make certain that your personality aligns with their brand and that you have the drive and ambition to run a successful business. They’re looking for brand ambassadors who will help the franchise grow. Franchisors are looking for people who are able to learn their system and grow their franchise within the guidelines of the brand. 

This development takes time. All parties involved want this relationship to be successful, so the vetting process is particular. Standards are put in place, and franchisees qualify based on a system of certain expectations. Two franchise requirements that are very important are your credit score and your net worth. 

Franchise Net Worth

Although conditions vary from brand to brand, each franchise you encounter will want to ensure that you meet their minimum net worth requirement. This is not a random amount. Franchisors have carefully calculated the necessary amount of money you must have to sustain your business. Especially in the first year of your venture as a franchisee, there may be a time when you need to tap into your assets to stay on track. That startup phase can be challenging until steady income and profits are being generated, which is why the franchisor must verify that you’ll be able to stay afloat using reserves if necessary. 

The second part of the equation is that showing your net worth confirms that you’re able to manage your money well. This shows you’re financially savvy and understand what it takes to make a business grow. The prospective franchisor sees you as a discerning prospect, and that’s appealing. You have many options in front of you, and you’re choosing to delve further into their brand. That’s a feather in your cap. 

The actual amount of net worth required typically hits between $100,000-$300,000; but this varies from brand to brand. If you have the assets, don’t let a large net worth requirement deter you. Setting the bar high may be indicative of what the franchise knows you will need to draw from as back-up funds. Most franchises require a minimum amount of liquidity as well. 

What comprises net worth? Your assets, including cash and cash equivalents, property, personal property, investments and retirement or other savings. You’ll subtract any liabilities you have like credit cards, car loans or mortgages, and that’s your net worth. Prior to applying to a franchise, you may want to pay down loans or credit card debt to have a better ratio. 

Franchise Credit Score

We’ve all been there, trying to qualify for a loan for anything from a car to an apartment lease, so we all know credit scores are a big deal. In franchising, it’s yet another tool franchisors use to determine eligibility to award a franchise. Your credit will be checked. 

Credit scores are indicative of how well you’ve managed your finances. According to Experian, a credit report provides detailed information on how you’ve used credit in the past, including how much debt you have and whether or not you've paid your bills on time. 

Franchisors want to see that you have a history of repaying debt and know how to manage your finances. It’s an insightful tool used to determine a prospective franchisee’s ability to handle financial matters.

Credit reporting agencies like Equifax, Transunion and Experian say typically, a “good” credit score is considered 600-750. It’s safe to say that franchisors are looking for candidates with a minimum credit score of 700, although, again, this number varies by brand. If your credit score is too low by brand standards but your other qualifications are on target, a franchisor might discuss with you the reasons your score is low. What they don’t want to see is that you carry high debt, bankruptcies, or a history of non-payment. That’s a big red flag. 

Financing Options

Once you qualify, you need a way to pay for your investment. There’s a variety of franchise financing options:

o   Direct financing for qualified buyers from the franchisor

o   Finance through the parent company’s preferred lenders

o   Commercial bank loan

o   SBA loan -Type 7(a) loans

o   Personal assets- home equity loans, retirement savings plans

o   Rollovers as business startup (ROBS)- withdrawing from 401(k)

o   Friends and family or partnership 

 

Attend an Expo for More Info

If you have additional questions about franchising, our website offers expert information at your fingertips. Although to have the most comprehensive understanding about franchising and explore different brands, there’s nothing like meeting franchisors in person.

MFV Expositions global brands has been hosting premier franchise events for more than 30 years. Attend an expo to learn the latest about the franchising industry.