In this edition of Localogy’s Local Radar series, we examine franchise crowdfunding platform FranShares.
The franchisor/franchisee relationship is a time-tested model. We’re talking about local entrepreneurs that buy franchise rights to open a Dunkin Donuts or Subway (or several locations), then become canonized as franchisees. Each franchise varies in marketing and operational terms but that’s the gist.
Though this model is prevalent, there are sizable barriers to entry for prospective franchisees. Chief among them is to cough up the cash to buy the franchise rights. Again, it varies widely but franchisees can pay six figures just to get in the door – other operational costs, COGS, and overhead notwistanding.
New investing platform FranShares wants to lower those barriers by bringing the crowdfunding model to the franchise world, also known as multi-location (MULO) businesses. Its model is similar to Kickstarter in that it’s a marketplace that sits between, and endeavors to match, franchisees and casual investors.
Guardrails
Given that this is a two-sided marketplace, its goals are to benefit (read: incentivize) both sides. The benefits to potential franchisees were noted (lowering barriers to entry), but what about investors? There, it’s all about investment opportunities for smaller investors… again, just like crowdfunding.
Of course, this raises red flags given that it could make it too easy for smaller investors – and thus unskilled and unaccredited investors – to get in over their heads. Here, the broader crowdfunding world has established guardrails, such as capping investment levels, which FranShares presumably replicates.
Speaking of investment levels, FranShares has fractionalized ownership to a level that requires as little as $500 to buy in. This could be a good level for casual investors who want the financial and hobbyist aspects of investing – and perhaps supporting their favorite brands – in a relatively low-stakes way.
Another way to think about this is simply another vehicle for passive investment income, which has existed for a while in areas like rental properties or SMB “friends and family” investments. If anything, FranShares brings more structure and visibility to these types of investment options for regular folks.
Safety Net
Back to franchisees, though barriers are lowered in this model, it’s not without downsides. Though they don’t have to deal with bank loans and other credit-based financing, they do have to give up equity. So it’s a tradeoff, like anything else, and that may be worth it for some to bring a franchise fee within reach.
And it appears to be working, as the two-sided marketplace is growing. Franchises involved include Teriaki Madnes, Smash My Trash, and Hawaiian Bros. And on the investor side, it has built a network of about 43,000 investors – which notably skew younger, with about half being millennial or GenZ.
And to address some of the above “guardrail” concerns, FranShares appears to operate above board, including FTC and SEC oversight. And each investment proposal has disclosure requirements around financials, exec backgrounds, and prior litigation. That at least should provide a reasonable safety net.
