Traditionally, sources of passive income have often involved real estate investments, including properties for rent.
FranShares, a startup from Chicago, is introducing a novel approach to passive income by enabling investors to fund franchises with as little as $500.
To those new to the concept, a franchisor is an entity that owns and licenses out a franchise business model – think McDonald’s. A franchisee, typically a local entrepreneur, acquires the license to run one or multiple franchise outlets. Despite the aspirations of many to own a franchise, the financial hurdle – with initial costs for reputable franchises starting around $100,000 and scaling to millions – is often insurmountable.
FranShares aims to connect franchise operators with investors eager to own a segment of a business minus the operational and financial burdens of direct ownership. For franchise operators, it presents an opportunity to fund growth more flexibly than through traditional bank loans or private equity, suggests Kenny Rose, the CEO and founder of FranShares. On the other side, investors receive partial ownership in franchise outlets and a chance at profit shares.
Currently, FranShares has fostered a community of approximately 43,000 investors, with nearly half belonging to the millennial or Gen Z demographics. These investors, varying from retail to accredited investors, family offices to private equity firms, have ventured into franchises across industries like food, children’s fitness, and waste management, involving brands such as Teriyaki Madness, Smash My Trash, and Hawaiian Bros.
To ensure investor protection, FranShares requires franchisors to reveal financials, executive details, and litigation history, under the regulation of the Federal Trade Commission (FTC). Furthermore, the startup’s activities are regulated by the SEC.
In its journey to scale operations, FranShares has secured $4.2 million in seed funding, led by Chicago Ventures, with contributions from The Pitch Fund, Litquidity Ventures (Lit Ventures), and founders Aaron Hashim and Brian Payne of Furnished Finder. This follows an initial $1.57 million pre-seed round in 2021.
The franchise sector in the U.S. boasted approximately $859 billion in revenue in 2023, indicating a ripe opportunity.
“Imagine being able to visit a Jimmy John’s, interact with the owner-operator, and then have the opportunity to invest in their growth by scanning a QR code on your way out,” envisioned Rose.
Expanding Accessibility
Kenny Rose initiated FranShares in 2020, leveraging his experience with over 600 franchise brands across more than 100 sectors, coupled with a three-year tenure as a franchise consultant before establishing Semfia, a franchise brokerage firm.
“My mission is to dismantle the ownership barriers faced by minority entrepreneurs, who often dedicate their careers to franchises without ever having the opportunity to own one,” he shared with TechCrunch.
Until recently, FranShares investors could only back franchise locations and franchisees. However, as of late June, the platform unveiled its first chance to invest directly in a franchisor, specifically Kidokinetics, a child-focused sports enrichment and education initiative. This move allows investment in the brand’s expansive capital drive aimed at launching numerous locations across North America.
The updates on investment avenues (including Kidokinetics and BraveHart/Hawaiian Bros.) are directed towards accredited investors, yet FranShares anticipates reintroducing opportunities for non-accredited investors soon.
FranShares monetizes by charging a monthly subscription fee for capital-raising franchisees and franchisors for investor relations management. Investors, on their part, pay an annual platform fee and a nominal acquisition fee for each investment participation.
“Though fast food is commonly associated with franchising, the model spans hundreds of industries beyond the food sector, such as haircare and automotive services,” noted Rose. “Our goal is to unlock access across these sectors and eventually incorporate real estate investments, allowing investors to create a ‘vertically integrated’ portfolio.”
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Compiled by Techarena.au.
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