Liquid Assets

✅ Short Definition

Liquid assets are cash or assets that can be quickly converted to cash without losing value. In franchising, liquid assets are often used to determine a candidate's financial ability to invest in and operate a franchise. They are essential for covering start-up costs and early operating expenses.  Also see “Liquid Capital”

🧾 Long Definition

In the franchise context, liquid assets refer to the portion of a franchise candidate's financial resources that are readily accessible and can be used to fund the business. These include cash, checking and savings accounts, publicly traded stocks, and other assets that can quickly be converted to cash without significant loss in value. Franchisors typically require a minimum amount of liquid assets to ensure the prospective franchisee has the necessary financial cushion to cover the initial franchise fee, build-out costs, equipment, inventory, and early operational expenses. Liquid assets differ from total net worth, as they do not include fixed or illiquid investments like real estate or retirement accounts.

Learn more about franchising in The Educated Franchise - 3rd Edition

🕰️ History and Usage

The term liquid assets originated in financial and accounting circles to distinguish between assets that could be easily used to meet short-term obligations and those that could not. In franchising, the concept gained importance in the 20th century as franchise systems began standardizing their qualification processes. Requiring a minimum level of liquid assets allowed franchisors to assess whether a candidate could manage initial investments and weather early-stage financial demands. Today, liquid assets remain one of the first financial criteria evaluated in franchise applications and discovery days.

❓ Five Common Questions About Liquid Assets

1. What counts as liquid assets in franchising?
   Cash, checking and savings accounts, and marketable securities are typical examples of liquid assets.
2. Why do franchisors care about liquid assets?
   They want to ensure the franchisee can afford the initial investment and sustain operations until the business becomes profitable.
3. Are retirement accounts considered liquid assets?
   No, retirement accounts are not considered liquid because they incur penalties and delays if accessed early.
4. Is real estate a liquid asset?
   No, real estate is an illiquid asset because it cannot be quickly converted to cash without time and potential value loss.
5. How much in liquid assets do I need to buy a franchise?
   It depends on the brand, but many franchisors require between $50,000 and $150,000 in liquid assets.

📝 Examples of Common Usage for ‘liquid assets’

• 'The franchisor requires all applicants to have at least $100,000 in liquid assets.'
• 'Liquid assets must be verified through recent bank or brokerage statements.'
• 'Insufficient liquid assets may disqualify a candidate from moving forward in the franchise approval process.'

📌 Summary

Liquid assets are a critical financial measure used by franchisors to assess a candidate’s ability to fund and sustain a franchise business. Having sufficient liquid assets helps ensure that new franchisees can cover the initial investment, manage operating costs, and navigate the start-up period successfully. Understanding and accurately reporting liquid assets is essential for franchise approval and long-term business success.