Every franchise has a set of requirements prospective owners must meet to begin the ownership process. In this article, you’ll learn about these requirements and how they can vary across franchise brands.
What are some typical franchise requirements?
Franchisors want to ensure that their future franchise unit owners have the know-how, capabilities, and financial capacity that’s needed to start and run a franchise unit. They do this, in part, because their owners’ successes and failures impact their bottom line. They also know that bad experiences can impact the brand’s reputation with customers and future franchise owners.
Most try to move forward with the best candidates by qualifying prospective owners.
Let’s dive into some common qualifiers:
Many franchisors require prospective unit owners to meet a minimum credit score. This is often the case when franchisor financing or loans will be used to cover part of the startup costs. Score requirements are usually 670 or greater.
Franchisors often have net worth requirements in place. Here, an owner’s net worth should prove their ability to cover startup costs.
Net worth is calculated as your total assets minus your total debts and liabilities. The precise net worth that’s required varies greatly from franchise to franchise.
Cash on hand
The costs to start a franchise unit can be significant, so many franchisors require prospective owners to have enough cash on hand to cover the franchise fee and other costs of startup. Some costs can be covered through financing, but for others, franchisors want to see that owners have cash or cash equivalents available for coverage.
It’s often the case that new franchises take time to turn a profit. Many franchisors prefer to see that owners have other sources of income that can help them stay afloat while the business gets up and running.
Franchisors like to see that their prospective unit owners have experience in fields similar or adjacent to the one the franchise operates within. In some cases, industry experience is a requirement. However, quite a few franchises don’t have an industry experience requirement.
Similarly, franchisors often prefer owner candidates who have some experience running a business, managing a team, and meeting targets. Franchisors may make specific requirements about the duration and kind of experience a prospective owner, believing experience equates to an owner’s ability to succeed.
What if I can’t meet some of the franchise requirements?
Most franchisors are eager to accommodate promising potential owners. And, sometimes, they’ll bend their own rules if they believe in an owner’s ability to succeed.
Here’s what that could look like. You might find that a credit score requirement isn’t necessary to meet, especially if your financing plans are already in place. Or, you may find that you can get credit for management or industry requirements through other work experiences, professional training, or coursework.
If you don’t think you can check all the boxes, talk it through with a franchise representative. You might find other ways to qualify.
Next, you should obtain the franchisor’s initial application and franchise disclosure document (FDD), a legal disclosure that contains almost everything you need to know about the business. With it, you’ll be able to assess whether a franchise opportunity is worth the investment that’s required.
For this part of the process, you should work with an attorney who can help you understand the terms and conditions of owning a franchise unit. Need help finding an attorney? Consider working with Contract Counsel. Check out their website here.
You should also share the FDD with a small business accountant who can help you make sense of the financial strength and stability of the business. Here are a few of the accounting firms many business owners like to use:
You can learn more about the due diligence process here:
You can find more guides, resources, and articles about starting and operating a franchise unit in your owner’s portal.