Do you know what McDonald’s, Wendys, Dunkin Donuts, KFC, and Burger King all have in common? Yes, they produce some of our favorite fast-food classics, but did you also know they are all franchises? Yup, anyone with enough capital can apply to open one of these juggernaut franchises and reap the benefits. But what about those of us that don’t have millions lying around to open one, is there another way to profit?
Up until now, the most common way to invest in a franchise is to buy its stock, if publicly traded. Don’t get me wrong, investing in any big franchise is great, but you are still subject to the whims of the market. You also might only see a minuscule fraction of the companies overall profits in dividends.
You could also open one yourself to see the direct profits. Not every franchise requires millions, but most do require much more than the few hundred or few thousand you might be able to invest.
Until now, you were basically out of options. So what’s changed? FranShares is now offering a way to invest directly into franchises to see much bigger returns for your investment.
What is a Franchise?
As mentioned before, McDonald’s, Wendys, Dunkin Donuts, KFC, and Burger King are some of the most popular franchises. But, what exactly is a franchise. Its technical definition is the right or license granted by a company (franchisor) to an individual (franchisee) to market and/or trade products and services in a specific area or territory.
What the heck does that mean? Basically, you have a company that allows individuals to use their logo, promotions, and overall brand, at a cost. For example, as we all know, Mcdonald’s is a company that sells burgers, among other products. However, each McDonalds (for the most part) is owned by different individuals. They paid their franchise fees of about 45k in order to buy the rights to using Mcdonald’s branding. They also pay McDonald’s corporate 5% of their monthly sales.
There are three types of franchise:
- Product: This is when a franchisor gives a franchisee permission to sell a product using their logo, trademark, and brand name.
- Manufacturing: The franchisor authorizes the franchisee to manufacture their products and sell them using their logo, trademark, and brand name.
- Business: This is without a doubt the most popular form of franchising. The franchisor licenses their brand to a franchisee with regulations surrounding how the business is managed.
Why Invest in Franchises?
There are several reasons one might choose to invest in a franchise. Your reasons could be different depending on which route you take.
If you are opening a franchise yourself, your main reason might be to quit your day job and work for yourself. Owning and operating your own business is many people’s dream. However, starting up a business on your own when you have no idea how can be very difficult. With the knowledge and expertise of a franchise behind you, you’ll be more likely to succeed.
If you are talking striking investing your money in a franchise, there are several reasons investors flock to them. For one, many of the bigger franchises are viewed as very stable and would have low volatility. At the same time, they can also offer high yield returns. In fact, FranShare’s target returns for its portfolios is between 16% and roughly 22%! More on this later.
Also strictly from an investing your money point of view, investing in franchises directs gives you that much more diversification. Not only can you invest in almost any industry out there, you aren’t putting your money in the stock market which can be influenced by many other factors other than the performance of the franchise.
Who’s Behind FranShares?
Once he rose through the ranks of the world’s largest franchise brokerage, he founded Semfia. Semfia is a franchise brokerage focused on income-producing and manager-run franchises.
What is FranShares?
FranShares is a whole new way of investing in franchises. In a similar fashion to other crowdfunding websites like Fundrise, Franshares will allow for the crowdfunding of the purchasing of franchises. Essentially, many investors will pool their money together which will then be put into a fund. FranShares will then do all the hard work of vetting out the best franchises to invest in. Individual investors will be able to invest with FranShares for as little as $500.
How Does FranShares Work?
FranShares has a six step process when investing your money and paying your returns.
FranShares has experts vetting hundreds of possible franchises. Using their selection criteria, FranShares will select which brands to invest in based on profitability, growth, manageability, recession resistance, and executive leadership.
FranShares will create different portfolios of franchises to invest in. These portfolios will include franchises at different locations, and across different industries to ensure diversification.
Once franchise locations are open, FranShares will handle all franchise management. Management includes creating locations, hiring of employees, and ongoing operations.
Fees can be the make or break point for many investments. Well, FranShares will be charging investors zero in fees. Yes, you read that right, zero in fees. FranShares will be putting up to 20% of the cost for each of their funds along with the individual investors. They will receive regular distributions and a share in any sales of franchises like the rest of us.
FranShares will be planning to pay out extra income to all investors to create a passive income stream.
FranShares will pay out distributions from franchises after a 12-18 ramp-up and will give investors their portion of any franchise sales.
FranShares is not a short-term investment. They will be recommending holding any investment with them for 5-10 years to see their full potential. They do plan on having a secondary marketplace that will let investors sell their shares earlier if necessary.
Is FranShares Regulated?
Yes, FranShares is regulated by the SEC like any other investment platform. All of the franchises it invests in will be regulated by the FTC.
The FTC requires each franchise to fully disclose its background, financials, and performance. FranShares will provide investors with reporting and regulatory compliance documentation in addition to what is required of them by the SEC.
How Does FranShares Pick Their Investments?
FranShares will mainly use eight different factors when selecting their franchises to invest in:
Return On Investment (ROI): FranShares prefers to only work with franchises that show net profits in their FPR so our investors can have a better understanding of potential returns. FranShares will attempt to avoid franchises with high buildout, employee, and inventory costs in order to have the highest ROI possible.
Growth: FranShares looks at several factors of a franchise’s locations to ensure that they are currently a growing franchise.
Availability: Location is everything when it comes to opening a franchise. FranShares looks for growing franchise brands that have the potential for multiple locations in good markets.
Leadership: FranShares will look for experienced leadership teams. FranShares will look for leadership that has experience in the industry and franchising in general.
Sustainability: Franshares will avoid “fad” franchises and will invest in franchises that have long-term staying power. Staples like fitness, automotive, and hair care are some of their favorites.
Competition and Competitive Advantages: Franchising does not make new industries but instead consolidates existing ones. We look at who the other competitors in their respective industries are, whether they are growing, and what our franchises’ competitive advantages are to capture market share in the space.
Manageability: FranShares will look for franchises with simpler operations, allowing for less management and fewer employees.
Recession and Pandemic Resistance: After what we’ve seen for the past few years, FranShares knows anything can happen. FranShares will focus on need-based industries that will thrive in all economic conditions.
What are the expected Returns?
As stated earlier, FranShares expected rate of return is in the 16%-22% range. This could be different per industry, according to their website, these are their main industries:
Haircare Average Net Profit Per Location: $111,120 (after year 3)
Fitness Average Net Profit Per Location: $300,979
Kids Average Net Profit Per Location: $159,981
Pets Average Net Profit Per Location: $147,683
Automotive Average Net Profit Per Location: $378,230 (top quartile)
Food Average Net Profit Per Location: $168,924
How Long Should I Hold My Investment?
FranShares should be considered a long-term investment. FranShares recommends holding onto any investment with them for at least 5 years, however, they will provide a way for you to sell your investment if needed. Holding onto your investment is suggested for two reasons, growth and taxes.
The Qualified Small Business Stock (QSBS) tax exemption may allow you to avoid 100 percent of the capital gains taxes incurred when you sell a stake in a startup or small business as long as you hold the stock for five years.
When and how often will I receive distributions?
FranShares will start distributions 12 to 18 months after a fund is launched. From there, distributions will be paid out at least on a quarterly basis. FranShares will attempt to make monthly payments if possible.
How does FranShares make money?
FranShares will not charge investors any fees to make money. Instead, they will be investing in the same funds they are offering to individual investors. Up to 20% of any fund will be invested by FranShares. FranShares will receive their portion of distributions and sales. They won’t make money unless the investors make money.
Investing With FranShares – Final Thoughts
I’m incredibly excited to be investing through FranShares. The franchising industry is stronger than ever and getting your foot in the door is a great way to diversify and see high returns similar to Fundrise.com.
The waiting list is already at 9200 investors and growing, so you better get on it now!
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.