Net worth is the value of all your assets minus the total amount owed to creditors. Net worth is calculated as follows: Assets – Debts = Net Worth.
Why is Net Worth Important in Franchising?
Every franchisor has a minimum net worth they expect a prospect to have when buying a franchise. Understanding what this means and why it’s important can help you have the right expectations for business opportunities.
Net worth can either be positive or negative. Positive net worth means that assets exceed liabilities, while a negative net worth means you have more liabilities than your assets.
Key Terms to Know
Let’s get an understanding of the different keywords that define net worth:
- Assets: refers to anything owned that has monetary value. Your assets include: liquid cash in the bank; monetary investments such as stocks and mutual funds; property valuation; and high-value personal properties such as jewellery
- Liabilities: These are monetary obligations that lay claims on your resources, such as loans and mortgages.
Calculating Your Net Worth
Net worth is all that you own minus all that you owe. It is simply total assets minus total liabilities. Fransmart has a comprehensive guide on calculating your net worth to evaluate your financial health.
Start with what you own: cash, retirement accounts, investment accounts, cars, real estate, and anything else that you could sell for cash. Then subtract what you owe, including credit card debt, student loans, mortgages, and auto loans. Then—you’ve got your net worth.
Net Worth = Total assets – Total liabilities
Is it possible for an item to be both an asset and a liability?
Yes. For example, your car can be both a liability and an asset. The percentage you have paid is an asset, while the portion you owe is a liability.
Types of Net Worth
Net Worth in Business
According to Investopedia, net worth is known as book value and shareholder’s equity. The value of a company’s equity is the difference between the total asset value and total liability value. Both lenders and investors check the company’s net worth during loan applications and investment rounds to determine if it is financially healthy.
Personal Net Worth
For individuals, net worth is the value that remains after deducting liabilities from assets. Net worth is used to categorize people and investors. These categories include:
- Designated accredited investors by the SEC who have at least $1 million outside of real estate ownership, and
- High net worth individuals (HNWI) form the majority of wealth managers and investment counsellors
Why Knowing Your Net Worth is Important?
Net worth can determine whether or not you will get approved as a franchisee. Every brand has different net worth requirements.
Knowing your net worth should be important to you as a business person because:
- Your net worth is financial security measuring tool at any given point.
- You can track changes in your net worth frequently to make sure you are making progress in your money management practices.
- Your net worth can help you understand whether you can take on new liabilities comfortably.
- Financial institutions offering you loans and financial assistance will also require you have a positive net worth.
Net Worth Statistics in the USA
According to The Motley Fool, the average net worth of a franchise owner is $122,000. However, there is more to this value when considering other factors such as age, race, and educational background.
A median net worth value provides a better picture of the financial status of Americans. The median net worth of Americans under 35 years old was $14,000, while the median net worth of Americans aged 65 to 74 was $266,070. Age plays a crucial role in determining the net worth of Americans.
How to Increase Your Net Worth?
Net worth isn’t the only way to judge financial well-being, but taking steps to increase it can also benefit you in the long run. As a general financial rule, the amount of liquid capital available to an entity determines how comfortable it will be. The following are tips on how to increase your wealth:
Focus On Paying Off Your Debts: Personal debt can weigh heavily on your net worth and reduce the impact of other steps to raise your net worth, like investing.
Raise Your Income: Learning a new skill or starting a side hustle are ways to boost your income, which helps you pay off debt, save, and invest.
Once you’ve built up an emergency fund in your savings account, investing is the next step to growing your wealth. Investing is a reliable way to build wealth over time. Franchising offers a great way to increase your net worth in the long term.
Net worth is important for anyone considering franchising. Your net worth will ultimately determine the franchise opportunities available. To learn what top franchising brands are available to you based on your net worth, contact Fransmart, the leading franchise development company for emerging brands, today.