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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 chance to invest in franchises for as little as $500.
For the unacquainted, a franchisor is a party that owns and licenses a franchise business model such as McDonald’s. A franchisee is a party, often a local businessperson, who buys a license and operates one or more franchise locations. While many people dream of becoming a franchisee, the ability to cough up or borrow enough cash is a massive barrier to entry. Upfront costs for “quality” franchises typically cost a minimum of $100,000 and can run into the millions.
The idea behind FranShares’ marketplace is to match franchise operators with investors wanting a piece of a business without having to deal with the headaches and expense involved with owning one. The advantage for franchise operators is the ability to access investment and fund expansion “without the drawbacks of bank loans or private equity,” according to CEO and founder Kenny Rose. Investors gain fractional ownership in franchise locations and the potential to receive excess profits as distributions.
To date, FranShares has built a “community” of about 43,000 investors — nearly half of which are either millennials or Gen Z. The investors overall are a diverse bunch, ranging from retail investors and accredited investors to family offices and private equity looking to diversify their portfolios. These investors have put money in locations for franchises spanning three different industries so far, including food, kids’ fitness and waste management. Specific brands include Teriyaki Madness, Smash My Trash and Hawaiian Bros.
FranShares wants to make sure people are protected, so franchisors must disclose financials, executive backgrounds and even litigation, and are regulated by the Federal Trade Commission (FTC). The startup’s offerings are also subject to SEC regulations.
FranShares has raised $4.2 million in seed funding led by Chicago Ventures to grow its business. The 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 2021 pre-seed round.
The opportunity is there. Franchises made about $859 billion in revenue in the U.S. alone in 2023.
“I see a future where you’re going to be able to go stand in Jimmy John’s and get served by the owner operator, and then on your way out, you see a QR code you can scan and go invest in their expansion,” Rose said.
Opening up access
Rose started FranShares in 2020 after having worked with over 600 franchise brands in more than 100 industries. He was a franchise consultant for three years before starting Semfia, a franchise brokerage.
“I’m passionate about removing barriers of ownership for minority businesspeople who often spend their entire careers in franchises without having the opportunity to become owners,” he told TechCrunch.
Investors on the FranShares platform had the ability to invest only in franchise locations and franchisees until late June when the marketplace offered the first opportunity to invest in the franchisor itself. That franchisor was Kidokinetics, a sports enrichment and physical education program for kids. It’s offering people to invest in its latest capital raise (with a goal of $600,000) as it prepares to roll out dozens of locations throughout North America.
The most recent investment opportunities (Kidokinetics, BraveHart/Hawaiian Bros.) are for accredited investors, but FranShares says it has offered investments for non-accredited investors in the past and expects to do so in the future.
The startup makes money by charging franchisees and franchisors raising capital a monthly subscription fee for investor relations management. Investors pay a flat annual platform fee and a “small” one-time acquisition fee each time they participate in an offering.
“Although franchising is typically synonymous with fast food, franchising covers hundreds of different industries that most people don’t think of, like haircare and automotive service,” Rose said. “We want to make them all as accessible as possible. We also plan to eventually add real estate so investors can ‘vertically integrate’ their investments.”
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