Historically, passive income has been associated with investing in real estate, such as rental properties.
FranShares is a Chicago-based startup that wants to offer investors another form of passive income: the opportunity to invest in franchises with as little as $500.
For those unfamiliar, a franchisor is the party that owns and licenses a franchise business model, such as McDonald's. A franchisee is the party, often a local businessman, who purchases the license and operates one or more franchised locations. Many people dream of becoming a franchisee, but being able to pay or borrow sufficient cash is a major barrier to entry. The start-up costs for a “quality” franchise usually cost a minimum of $100,000 and can reach millions of dollars.
The idea behind FranShares' marketplace is to match franchise operators with investors who want to get a piece of the business without the hassle and expenses that come with owning a business. The benefit for franchise operators is that they can access investment and fund their expansion “without the drawbacks of bank loans or private equity,” according to CEO and founder Kenny Rose. Investors get fractional ownership of a franchise location and potentially receive excess profits as dividends.
To date, FranChease has built a “community” of about 43,000 investors, about half of whom are millennials or Gen Z. Investors are a diverse group overall, ranging from retail and accredited investors to family offices and private equity firms looking to diversify their portfolios. These investors have so far put capital into franchise locations across three different industries, including food, kids' fitness, and waste management. Specific brands include Teriyaki Madness, Smash My Trash, and Hawaiian Brothers.
FranShares wants to make sure people are protected, so franchisors must disclose financials, executive backgrounds, and even lawsuits and are regulated by the Federal Trade Commission (FTC). The startup's offerings are also subject to regulation by the SEC.
FranShares has raised $4.2 million in seed funding led by Chicago Ventures to expand its business. Pitch Fund, Litquidity Ventures (Lit Ventures), and Furnished Finder founders Aaron Hashim and Brian Payne also participated in the round. FranShares previously raised $1.57 million in a pre-seed round in 2021.
The opportunity is there: franchises generated approximately $859 billion in revenue in the United States alone in 2023.
“I can see a future where you can stop by a Jimmy John's, be served by the owner-manager, scan a QR code on your way out and invest in the store's expansion,” Rose said.
Opening up access
Rose founded FranShares in 2020 after working with over 600 franchise brands across more than 100 industries. He worked as a franchise consultant for three years before founding franchise brokerage firm Semifia.
“I'm passionate about removing the barriers to ownership for minority business people who spend their entire careers in franchises without ever having the opportunity to become an owner,” he told TechCrunch.
Investors on the FranShares platform were only able to invest in franchise locations and franchisees until late June, when the marketplace first offered the opportunity to invest in the franchisor itself. That franchisor is Kidokinetics, which offers sports enrichment and physical education programs for children. The company is seeking investments for its latest round of funding, with a goal of $600,000, as it prepares to expand to dozens of locations across North America.
While the latest investment opportunities (Kidokinetics, BraveHart/Hawaiian Bros.) are for accredited investors, FranShares says it has offered investments for non-accredited investors in the past and will continue to do so in the future.
The startup makes money by charging franchisees and franchisors who raise capital a monthly subscription fee for investor relationship management. Investors pay a flat annual platform fee and a “small” one-time acquisition fee each time they participate in an offering.
“While franchising is commonly synonymous with fast food, it covers hundreds of different industries that most people wouldn't think of, like hair care or auto service,” Rose said. “We want to make all of this as accessible as possible, and eventually we plan to add real estate as well, allowing investors to 'vertically integrate' their investments.”
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