FranShares Review: Invest in Franchises Like Stocks

Chicago startup FranShares, founded in 2020 by Kenny Rose, will be the first investing platform to offer fractional ownership of franchises to any investor (accredited or not). For as low as $500, regular people will soon be able to invest and have partial ownership of franchises with FranShares. This FranShares review will run through exactly what FranShares is, how it works, and what returns investors can expect from FranShares.

What is Franchise Investing?

Before diving into what FranShares is, it's essential to understand franchise investing.

A franchise is simply a business managed by a single entity (the franchisee) with branding, rights, and trademarks owned by a larger company (the franchisor). When thinking of franchises, the names that usually come to mind are McDonald's, Subway, and Starbucks. People don't know that the franchising market is much bigger, with over 780,000 unique franchises in the US alone, 4000 franchisors, and more than 100 industries ranging from haircare and automotive to fitness and senior care.

Though franchises are everywhere, investing in them is not so straightforward. The first way to do so is to contact the franchisor directly. This often requires lots of due diligence and hands-on work on the end of the investor. The second way is to go through a franchise broker. Much like a stockbroker, a franchise broker would do a lot of your research and decide on what franchises you should consider. Either way, this would require a large amount of capital (ranging to over $1,000,000) along with franchise management expertise.

So far, though, there has not been an effective way to indirectly invest in franchises other than through syndicates (becoming a partner who raises capital for the franchise investment). This is where FranShares comes in.

What is FranShares?

The brainchild of Kenny Rose, FranShares aims to provide everyday people with the opportunity to invest in franchises. Rose originally came from a very traditional finance background advising high net worth individuals on their investment strategy at Merrill Lynch.

While he was there, he learned the true effects headlines could have on your investment portfolio. Wanting to help people build wealth without the media's influence, he joined the franchise world as a franchise broker.

As a franchise broker, he educated individuals on the franchise world, matched them with franchises based on their budget, skillset, and goals, and then coached them throughout the research process to make a safe investment. He founded his own franchise brokerage and became an educator in the space, eventually reaching over 300 million people.

He found growing demand among investors throughout the years to passively build an additional income stream with franchises and diversify their portfolios. FranShares was created as a new asset class that allows investors of all sizes to participate in the $787 billion franchising market.

How Does FranShares Work?

Affiliated with Templum, a registered broker-dealer, FranShares works very much like a private equity firm.

Retailer investors pool together money to form a fund that FranShares fully manages. FranShares will then use this fund to purchase franchises (either directly or indirectly) and operate/control them. After successfully building up these businesses, investors can realize a return in two ways.

  1. The increased equity value of the franchises.
  2. Ongoing dividend payments (after one year)

Each FranShares fund is registered with the SEC for a Regulation A+ raise. This allows investors to have complete transparency, participation by accredited and non-accredited investors, and a broader reach for the fund.

The way that FranShares makes money is beneficial to investors too. FranShares is launching with zero fees and zero hidden costs. Franchisors pay Franshares a brokerage fee that does not come out of the amount raised from investors. Aside from that, in every fund, FranShares will be partnering with investors, usually putting up around 20% of the total cost in return for 20% of the ownership. FranShares will receive dividend distributions simultaneously as investors and will only be making money when investors do.

How are Investments Selected?

FranShares uses a variety of criteria to select which franchises to invest in. Some of them are:

  • Return on Investment (ROI): FranShares tends to avoid franchises with high buildout costs, employee headcounts, and inventory. Instead, it invests in franchises that can show net profits in their Financial Performance Representation (increasing potential ROI).
  • Growth: FranShares looks at each franchise’s growth per location, store sales, and number of franchisees to ensure the brand is growing.
  • Availability: While most people think of major fast-food franchise brands when thinking about franchising, the availability for new locations is limited-to-nonexistent in good markets. FranShares looks for growing franchise brands that have availability for multiple locations in good markets.
  • Leadership: An experienced team with prior experience with franchises is another must when FranShares looks at investments.
  • Sustainability: FranShares looks for businesses in stable industries like haircare, automotive, fitness, etc.
  • Competition and Competitive Advantages: Franchising does not make new industries but instead consolidates existing ones. Franshares looks at who the other competitors in their respective industries are, whether they are growing, and what Franshares’ franchises’ competitive advantages are to capture market share in the space.
  • Manageability: Because FranShares is all about passive investing, they look for semi-absentee franchises that can be manager-run and typically have lower headcounts and simpler operations.
  • Recession and Pandemic Resistance: Essential and need-based industries are a priority as these tend to be more resistant to significant world events (like pandemics).

What Kind of Returns Can Investors Expect?

Each holdings return will differ based on which franchises are invested in with the holdings. That being said, franchising is regulated by the Federal Trade Commission (FTC), so all of the information about franchising costs is made publicly available, including startup costs, financial performance representation, and projected earnings.

Going onto FranShares's website, here are some potential franchises and annual location returns that are pulled directly from the audited FDDs (required by the FTC):

  • Waste management: 49% – 160%
  • Home services: 99% – 151%
  • Food: 24% – 51%
  • Fitness: 42% – 98%
  • Haircare: 26% – 33%

Because franchising is all about growing businesses, FranShares recommends a longer holding period of at least five years. That being said, there will be a trading platform from day one for investors who choose to sell their shares based on demand.

More on FranShares

Some frequently asked questions about FranShares (and their answers) are:

  • Is FranShares open to investors outside the US?
    • Yes
  • Can investors invest in FranShares using a self-directed IRA or 401K?
    • Yes
  • What kind of SEC regulations cover the offerings from FranShares?
    • Regulation A+
  • What is the minimum investment amount (in USD) on FranShares?
    • $500

Recap: FranShares Review

With market prices at an all-time high and increased competition from institutional investors / foreign investors in all kinds of asset classes, many investors are starting to seek areas that can provide them with a higher return on their investment (yet is still passive).

FranShares provides a solution to this problem, allowing investors to tap into the vast franchising market passively. Not only is FranShares innovative, but it also heavily focuses on local ownership so that investors can both be ambassadors and customers for the businesses they partially own.

As of now, the plan is for FranShares' first fund to go live soon. Join the waitlist here or check out some of their social profiles below:

 

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Jeff is a current Harvard student and author of the blog Financial Pupil (https://financialpupil.com/) who is passionate about learning, living, and sharing all things personal finance-related. He has experience working in the financial industry and enjoys the pursuit of financial freedom. Outside of blogging, he loves to cook, read, and golf in his spare time.