Some states will look at a new franchisor, or in their perception an undercapitalized franchisor, and require what the industry calls “financial assurance.” A financial assurance provides “assurance” to the state regulators that you, as the franchisor, will have an incentive to perform your obligations and won’t go broke before the franchisee opens, or if you do go broke before the franchisee opens, the franchisee will not lose their franchise fee. Typically, although this is more of a guideline and not a rule, the states like to see at least $100,000 in non-borrowed cash on your balance sheet if you are a new franchisor or at least $100,000 net worth if you have been franchising for at least a year.
It is worth noting that not only do the state regulators look at your balance sheet, but your prospects do as well. So, a new franchisor with $5,000 in the bank who is looking to charge franchisees a $30,000 franchise fee will not appear as strong as a well-capitalized startup franchisor.
If you have a financial assurance requirement in place in a state, you will see an orange outline around the state. This should serve to remind you that you won’t be able to collect the initial franchise fees for any franchisee with whom you sign a deal who is a resident of that state.
The types of Financial Assurance you may provide are:
- Deferral of all initial fees owed to you until you’ve performed all of your pre-opening obligations (our recommendation)
- Posting of a surety bond
- Placement of the initial fees in escrow
- A guarantee of performance by your affiliate or parent company
The types of Financial Assurance available to you varies from state to state and may vary within a state depending on the state examiner assigned to your filing.