Meet FranShares, the platform for investing in franchises

The Offer Sheet readers —

This Sunday, we are looking forward to sharing with you all the story of FranShares, as told in our interview with founder and CEO Kenny Rose.

FranShares has created the only platform of its kind that allows retail investors to invest in the best franchise businesses passively without lifting a finger and getting returns in the form of quarterly dividends + equity appreciation, similar to short term rentals. Just not much work in this case - and the ability to diversify your portfolio.

We delve into topics like how they choose the franchises to invest your dollars, why franchises are a good investment, how Kenny Rose started FranShares, and what the future holds.

This Sunday, we are excited to chat with FranShares and discuss how simple they are making investing fractionally into an asset class I didn’t realize existed until recently - franchises! At a high level, why invest in franchises?

For decades, wealthy investors, private equity firms, and celebrities (like Shaq!) have used franchise investing as a way to build wealth.

And it’s now wonder that they do. Franchise investing offers, consistent cashflow, equity appreciation and diversification away from volatile public markets.

As an STR / real estate investor, I’m typically looking for cash flow + appreciation + tax benefits. In diversifying my portfolio, why franchises vs. say stocks or a high yield savings account?

Passive franchise investing allows investors to diversify their portfolio while potentially earning passive income.

Unlike assets traded on public exchanges, which may experience considerable fluctuations due to investor sentiment, the growth in value and disbursements from franchise investments are determined over the longer term by the business operations of the franchises.

Additionally, franchise investing may result in both consistent cash distributions and equity appreciation, potentially providing returns that exceed the S&P500.

Franchising is an interesting model in the sense that I think of successful franchises as well oiled machines. The franchisor has typically established a set of best practices for its franchisees to follow to get X percent returns every year. Is that part of what makes it an appealing investment?

Absolutely, franchisors have meticulously honed a set of best practices, ensuring that franchisees can replicate their success formula to achieve consistent returns. This structured and proven blueprint reduces the uncertainty and variability often associated with individual business ventures making them an appealing investment class.

This separates franchise investing from Venture Capital. Instead of relying on companies to figure things out, you simply can rely on the proven processes that franchises have built.

How do you choose the franchises that you’re invested in and how do you go about getting a piece of that investment that others can then buy into? Say that you target Dairy Queen as an investment.

The FranShares Selection Process

FranShares pursues every franchise opportunity using a systematic due diligence process. Investment teams evaluate franchise businesses for potential fund inclusion using specific metrics. In general, our selection process proceeds as follows:

Meticulous Screening and Selection

FranShares investment team sources franchise opportunities from leading industries, such as personal services, home improvement, education, and healthcare. The teams spend considerable time pre-qualifying investments and evaluating potential franchises. At FranShares, our investment team is highly selective and chooses less than 1 percent of the deals that come across our table to offer to our investors.

Rigorous Due Diligence

After initial qualification, franchise investment teams dig deep into the financials and operating documentation for potential franchise businesses. By applying extensive franchise brokerage knowledge to our due diligence process, we can ensure the franchise brands we include in our funds meet a high bar in terms of operation and profitability.

Some of the additional checks we perform during a due diligence process include:

Performing a legal FDD review.

Conducting site visits to current locations.

Meeting with Franchise brand executive teams.

Speaking with existing franchisees. 

8 Components of a Winning Franchise Investment

These eight factors play the most significant role in our decision on whether (or not) to include a franchise business in an investment fund.

Return on Investment: FranShares examines the franchise disclosure documents and reported financial disclosures that are required by the FTC. We select brands with a proven track record of profitability.

Growth: Next, we evaluate the speed and growth of the franchise brand. This involves examining not just the gross number of locations. We also look at the total growth of location numbers, the performance of individual locations over time, as well as turnover, transfers, repurchases, and liquidation of all franchise locations. We pay particular attention to the growth of new locations.

Availability: The best franchise in the world can’t help you succeed if the territory is unavailable or a market without growth potential. We look for franchises that are in growth mode, with ample room for expansion and low market saturation to reduce the potential for internal competition. We look for any territory restrictions that would inhibit our ability to grow within the franchise brand.

Leadership: Once we are confident in the numbers, we look at the people. Franchises live and die on the quality of leadership and the support a franchise brand provides to its franchisees. We take time to learn about the key decision makers within the organization and conduct due diligence into their history within the franchise industry.

Sustainability: Supply chain sustainability is critical in the post-pandemic investment ecosystem. We look for franchise opportunities that offer sustainable, resilient operations. A high focus on sustainability ensures stable returns as economic conditions evolve.

Recession and Pandemic Resistance: We seek out new franchise opportunities within traditionally recession-resistant industries. In light of the global impacts of the COVID-19 pandemic, we look for deals that can weather any storm, including large-scale public health disruptions.

Competition and Competitive Advantages: We look beyond the franchise brand itself to understand how it fits into the larger picture of market industry leaders and competitors. We pay special attention to the “secret sauce” that differentiates brands and commands market share.

Manageability: Not every franchise business has an operating model that’s suitable for inclusion in a fractional fund. We look for opportunities with low overhead and streamlined operations that can benefit from our portfolio management model. Manageability is an important factor in ensuring returns for our fund investors.

What type of annual return can investors expect? Are those dividends paid out quarterly or how does it work?

Every franchise investment opportunity has differing returns, so it is best to review each offering in detail to understand the return profile. However, FranShares strives to provide the best franchise investment opportunities for investors that provide consistent distribution disbursed quarterly, along with equity appreciation with the goal of exiting a portfolio in 5-7 years.

What is the FranShares story and how did the business originally start?

The FranShares story starts like many other start-ups… with an idea that hit me like a thunderbolt back in 2014.

At the time, I was sitting on a substantial franchising knowledge base. I was managing half of the LA territory for a franchise brokerage, drawing on my experience working with more than 600 franchise brands across 100 different industries. I would take inventory of the potential owners’ goals, skill sets, and budget, recommend specific franchise brands to research, and then I’d coach them through the research process all the way to actually purchasing a franchise. I even co-authored a book on the franchising space.”

One morning in 2014, I read about Fundrise closing its Series A. The article dove into all the reasons people were psyched about the platform, and raved about how Fundrise was the first investment platform to create a simple, low-cost way for anyone to access an asset class that was typically reserved for the ultra-wealthy.

And that was the moment a world-shaking realization hit me: This fractionalized model could absolutely work for franchise investing.

I didn’t want to launch right away, so I spent a number of years building my business experience and networking more within the industry. I opened my own brokerage in Chicago, and found some unexpected success from a piece I wrote about franchising that I posted on Quora. After that post went viral, it put me on the radar of some major media outlets.

I ended up being a major source for a January 2020 Sunday piece in The Hustle on why a Chick-fil-A only cost $10,000, which went on to become one of the publication’s most popular stories that year. All the while, my idea for a fractionalized franchise investing platform continued simmering in the background. I was later featured in Forbes, ABC, American Express’ blog, and Business Insider, reaching over 300 million people.

I was lucky enough to be interviewed by Business Insider during the onset of the pandemic to give insight into the value of franchise brands that were prepared for the food delivery model!

And then the pandemic hit. In early lockdown, I read an article about how people were gambling on the stock market because there weren’t any sports to bet on. I immediately kicked myself in the head (figuratively, of course). I thought, “If only I’d had my franchise investing idea going there’d be a billion in assets under management right now.”

So I stopped my brokerage. Just like that – completely, hard stop. I dropped everything to start FranShares. I built a website and went full-steam ahead, picking brains and making connections. When I pitched FranShares to our law firm, they were so confident that we would address the issues facing the franchise investing space that they waived any fees until we got our first check from an outside investor.

Is there anyone else doing anything like what you guys are? If so, what makes you different / unique?

FranShares is the first and only platform to connect franchise operators with retail investors with the goal of unlocking an asset class for investors and providing capital for operators.

Is there a minimum or maximum into how much I can invest? And how long should I expect to hold my position? 

The minimum amount you can invest in FranShares’ offerings is $500. Franchise ownership is designed as a long-term investment strategy. We generally recommend that investors be prepared to hold their investments for a period of five years or more to fully reap the benefits of this asset class.

Is there a platform I could see my investment over time?

Yes! Our investment platform is hosted on Securitize where investors are able to view and monitor their investments.

What type of feedback are you getting from customers?

Before we launched FranShares, we spoke with more than 600 investors because we knew that many weren’t experts in franchising, franchise investing, or alternative assets. We wanted to understand what questions our prospective investors had so we could thoughtfully provide answers. We spent more than 100 hours speaking to investors about their challenges and needs. Based on what we learned from those conversations we were able to build our educational content around the most common questions and concerns investors have.

What are the future plans for FranShares? Can someone invest in FranShares directly?

Our current plan for FranShares is to consistently launch franchise investment portfolios and provide outsized returns for investors. By focusing on this goal, we believe that we will not only truly democratize franchise investing, but help operators around the country expand like they never could before.

We’re currently raising a seed funding round, so if you are an angel investor feel free to reach out to [email protected].