This week I sat down with Kenny Rose, founder and CEO of FranShares, a unique new platform enabling you to make fractional investments in franchises.
Check out the podcast to learn:
- Why investing in franchises is so compelling
- How Kenny’s background in finance, franchise brokering led to FranShares
- Which game show Kenny was on (and almost won!)
- How the company navigated financial and legal hurdles
- How FranShares’ business model is similar to a REIT
- How FranShares chooses and sources franchises
- How FranShares is able to have no fees
- What Stefan loves about Chick-fil-A (Hint: it’s not the burgers, though those are great)
- Why immigrants are the perfect franchise owners
- How the pandemic has affected fractional franchise investing
- What’s next for FranShares
Table of Contents
Franchises are a unique, reliable, often overlooked alternative asset.
Unlike other passive investments, putting your money directly into a franchise is more of an active effort. It’s almost like starting your own business. Naturally, this is suited to those with an entrepreneurial flair. Just like buying an online business is a way to fast-forward product-market fit, franchising is a good way of skipping the first 5-10 tumultuous years of business ownership. Ultimately, you’re buying time.
Buying a franchise is well-suited to those involved in the corporate world who want a more hands-on occupation, those who want to “buy their next job,” or even those just looking for an investment they have direct control over.
What is a franchise, exactly?
Simply put, a franchise is a business that is managed by a singular entity (franchisee) but the branding, rights, and trademarks are owned by a larger, national or international company (franchisor).
The franchisor (in this instance, let’s say 7-11) sells their current branding, business model and training structures to franchisees, who will then run it for a settled-on period.
When you think about franchising, what are the first businesses that pop into your head? Probably McDonald’s, Subway, Arby’s and other fast food, right?
However, this is just the tip of the iceberg. In the USA alone, there are over 773,000 unique registered franchises. This figure includes companies in fields such as:
- Car washing (think Breaking Bad)
- Window washing
- Custom-tailored suits
- CEO training
- Waste management
- Sex shops, including the famous Adam & Eve
Pretty much any company that exists can be a franchise.
How to invest in a franchise
The vast sea of available investment options makes an initial investment into franchises quite a mountainous task. Having to choose from such a sheer number of potential businesses can be problematic for even the most experienced of investors.
This is where a franchise broker comes in.
Operating much like a stockbroker, website broker, or real estate broker, franchise brokers align investors’ goals with suitable investment candidates. Providing you with pertinent details and opportunities, hiring a broker can make the transition into franchise investment much smoother.
That said, franchise brokers are typically paid on commission, and represent a specific portfolio of businesses. This means that their advice is typically biased to some degree, as they will only pitch franchises within their pool to you. The simplicity of going with a broker may be appealing, but by the same token it inherently limits your investment opportunities.
Alternatively, investors can contact franchisors directly.
While this requires a higher level of due diligence and financial independence, choosing which franchise you’d like to invest in without third-party input can significantly increase your available options.
The best way to fly solo might be to narrow down your choices to within a certain industry you’re optimistic about, analyze franchise fees and maintenance costs (which can really add up), assess market viability, and ensure that the franchisor has a rigorous, well-received training program.
An independent franchise advisor is another option for going direct. They can provide the best of both worlds, averting the limitations of an affiliated broker, while still avoiding much of the tireless research you’ll need to do before taking on a business.
Finally, you can invest in franchises indirectly. This is exactly what FranShares allows — you can put your money into a portfolio of franchise businesses that are already generating revenue.
More on that below…
How much does it cost to own a franchise?
Buying a franchise is not cheap.
Pricing is usually based on the recognition of each individual brand (McDonald’s is going to cost more than your local laundromat), but you typically need between $100,000 and $1,000,000 to get going, with some franchisors requiring an upfront investment of over $2 million.
Franchise fees for the top franchise brands include:
- Taco Bell: $500k – $3.7m
- Planet Fitness: $968k – $4.1m
- Dunkin’ Donuts: $200k – $1.7m
- UPS: $138k – $567k
- McDonald’s: $1.3m – $2.3m
As you can see, the entry point for well-known company franchises can be pretty high. Many investors will find these figures out of reach, even if assigned a palatable payment plan. When you consider that the average yearly return on restaurant franchises is around $83k/year, the margins are pretty slim.
And that’s to say nothing of the time cost of running a franchise. When you factor in basic managerial tasks (such as training and hiring new employees, maintenance etc.) at the start of your tenure, you might see yourself working 12 hour days, 7 days a week.
So, how do we get around the financial and time strain of purchasing a franchise outright?
Fractional investment through FranShares
Previously, the only method of purchasing a franchise as a ‘syndicate’ was by being a silent franchise partner — someone who raises the capital for an investment but plays no role in the day-to-day management of the business.
However, when President Obama signed the Jumpstart Our Business Startups Act in 2012 (better known as the JOBS act) businesses were allowed to begin ‘crowdfunding’ to issue securities — essentially legalizing anonymous fractional investment. This is what led to the boom in fractional investment platforms such as Rally, Collectable, Otis, and dozens of others that we love exploring here at Alternative Assets.
Fractional investment in franchises was slower to get going. But it’s here now.
The history of FranShares
FranShares was born as CEO Kenny Rose watched the unravelling of Greece’s economy in 2010. While this seemingly wouldn’t affect most portfolios directly, the sensationalist headlines and media coverage still resulted in many investment portfolios taking an indirect hit.
With a background in finance, brokering franchises and providing education on these topics to an audience of 300,000, Kenny created FranShares to provide an accessible entry point to franchise investments.
FranShares is unique in its franchising structure — instead of focusing on fast-food businesses (the “sexiest” and by far the most common franchise investments) FranShares looks to the service industry, providing users the ability to purchase shares from your local gym, automotive and education businesses. This is due to the relative lack of inventory needed, lower employee turnover, and lower necessity for having large storefronts. This all means that margins are easier to manage, and yields are easier to realize.
Very smart. Kenny knows his stuff, and it shows.
How does FranShares work?
In order to help diversify assets while maintaining affordability — the two key elements of FranShare’s business mission — the company doesn’t buy individual franchises and then sell shares of that specific business.
Instead, they offer an entire portfolio comprising 50-100 different franchises. This allows investors exposure to a diversified set of businesses across different geographies and industries.
Think of it like an ETF or a REIT, but for franchises.
As well as being a major strategy in mitigating risk and resisting recession, generating such a range of investments allows users to contribute positively to their community. Local businesses will see tremendous benefits from the funding, and there’s something special about being able to walk around town, thinking ‘I invested in that company,’ and knowing that you’re making a real difference.
Due to their infancy, FranShare doesn’t yet offer themed portfolios (investing in a specific type of business) or smaller lines of franchises. But it is a part of their future plans.
What’s crazy about FranShares is that there are no fees. None. Considering the monumental payments that must be made for traditional franchise ownership, the fact that this platform can offer lower starting points in conjunction with no fees is incredibly enticing.
FranShares are able to avoid unpopular fees through a few different means:
- The franchises provide FranShares a brokerage fee for selling them in the portfolio — almost like a commission.
- FranShares doesn’t just operate as the middle-man — they partner with their investors and thus share in the capital gains. (This is also a great initiative for building trust, as FranShares is essentially putting their money where their mouth is)
If you charge fees, you lose-Kenny Rose
Although there are no franchise fees, there is a $500 minimum investment, which relative to a few hundred thousand for outright franchise purchase, is not bad at all.
So why have a minimum? While other fractional investment platforms offer a lower entry point, FranShares’ goal is to provide users with a long-term investment. The slightly higher minimum is intended to users know that they are in it for the long haul.
With that said, FranShares is making strides towards solving the infamous illiquidity issues that fractional investment platforms run into, through a future secondary marketplace designed for P2P trading.
How has the pandemic affected franchising?
The Covid pandemic resulted in some of the most radical economic and business plan changes, with many franchises and storefronts closing down temporarily (and many others sadly going out of business).
Each business sector has coped differently through the difficulties. Adaptable, personable and technologically-savvy franchises actually saw an increase in business (think fast-food chains and online delivery services).
While FranShares wasn’t live during the initial commercial plummet, due to anti-Wall Street sentiment (think of the Gamestop debacle) and need for portfolio diversification away from real estate and the stock market, Kenny believes his alternative investment opportunity would’ve been extremely profitable during these tumultuous financial times.
How FranShares sources franchises
Kenny’s past experience in finance and franchising guides the selection of franchise businesses to include in the portfolio. They only partner with franchises that have a proven, well-rounded and functional management teams which deliver profits year after year.
For a brand to become eligible to sell a franchise, they must complete a Franchise Disclosure Document (FDD), which essentially contains all of an investor’s due diligence in one convenient, often an extremely large stack of papers. It will include past performances, information on training, investment costs, the leadership team and so on. It has details on everything.
FranShares tends to support high-margin, service-based businesses that will always play a role in consumers’ day-to-day lives. By analyzing the FDD, FranShares is able to hone in on franchises that support their business motto and provide an exciting investment opportunity.
What’s next for FranShares?
FranShares is launching its initial fund in 2021.
So, how do you get involved?
They are still going through the registration process with the SEC. So for now the only way to invest in their portfolio is to join the waitlist.
There is a limit on the amount you can invest for their first fund. Due to the demand and business plan, it is essential that you join the waitlist as soon as possible. On the plus side, you don’t have to be a US citizen or an accredited investor. (This is great news, but will cause demand to go even higher!)
Perhaps the most exciting goal of FranShares is the potential facilitation of visas for offshore investors. While this may a ways off, this would truly be a game-changer in the fractional investment world.
Kenny’s theory is, ‘if you help create jobs in the local US communities, you deserve to live here’.
We couldn’t agree more.
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- I’ve really been enjoying Richard Patey’s newsletter on the Creator Economy. Lately he has been doing some interesting writing on creator tokens, whereby audiences are becoming incentivized to go from being content consumers to contributors. Check it out.
- Finally, we’d like to thank everyone who upvoted our Product Hunt launch last week! We saw a terrific upswing in registrations, and amazingly had just 8 fewer upvotes than Clubhouse’s new app! (Although this probably says more about Clubhouse being overhyped than anything else. But I digress.)
- Side note #1: To those who upvoted and/or followed us on Twitter, we are still going through the upvotes/follows and crediting everyone’s account as promised (forgive us as this is a manual process.) Rest assured, your actions will be counted as referrals.
- Side note #2: Our top referrer is actually none other than Kenny from FranShares! Kenny has already won a bunch of swag, including a mug, t-shirt, and hoodie. Can you beat Kenny?