Capital adequacy
What it means
Capital adequacy is the question behind franchisor net-worth and liquid-capital requirements: do you have enough money not just to open, but to survive until the outlet is cash-flow positive? Undercapitalisation is a leading cause of otherwise-viable franchises failing early.
It combines the total investment (fee, fit-out, equipment, stock) with a realistic working-capital buffer for the ramp-up, and a contingency for surprises.
In practice
Do not fund only the opening cost. Add a working-capital buffer sized from your cash-flow forecast, plus a contingency. If meeting the entry requirement leaves nothing spare, you are likely undercapitalised.
A real example
Two buyers open identical franchises; the one who set aside six months of working capital survives a slow winter, while the one who spent everything on fit-out runs out of cash and closes.
Capital adequacy, FAQs
What does capital adequacy mean for a franchise?
Having enough money to both open the business and sustain it until it is profitable, up-front costs plus a working-capital buffer and contingency. Undercapitalisation is a top cause of early failure.
How much buffer do I need?
Size it from a stress-tested cash-flow forecast covering the ramp-up, not a rule of thumb. If the entry requirement leaves no spare cash, treat that as a red flag.
See the full franchise glossary, the Fee Index or our buyer guides.