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How to Generate Passive Income Through Franchise Investing


Investors have long thought of franchise ownership as a preferred method of achieving stable investment portfolio diversification. It offers high-yield returns, a predictable investment timetable, and resistance to both inflation and recession. The franchise model also offers a safe, low-volatility investment vehicle that’s regulated by the Federal Trade Commission (FTC). 

Despite these benefits, however, the traditional franchise model presents barriers that deter many investors from participating. For instance, franchise ownership requires hundreds of thousands, if not millions, in upfront investment, which makes it a tool primarily for wealthy investors. Also, owning a franchise requires some level of experience with franchise management, which prevents many otherwise qualified investors from moving into franchising. 

A third barrier for the average investor is that franchising requires a significant investment in time. The hours required to operate a franchise location (for activities such as hiring, scheduling, supervising, and ordering, among others) are often an issue for investors who simply do not have the time to spare. 

These challenges have prevented many from investing in franchises – but now there’s a new way to enjoy its benefits. FranShares presents an alternative method of franchise investment: a lower-risk, democratized approach that mitigates the traditional barriers to entry and allows the average investor to take advantage of this important asset class.

The numerous benefits of franchise ownership make it an attractive option to those with the time and capital to invest. In addition, a combination of low volatility and high potential returns has made the franchise model a perennial favorite of investors looking to better diversify their portfolios and income streams.

Healthy returns

Alternative asset classes attract sophisticated investors for one primary reason: They offer a historically better return on investment than other options available to retail investors. 

Any investor can participate in alternative investing thanks in part to the JOBS Act (Jumpstart Our Businesses Startups Act), which allowed for the democratization of alternative investments with SEC regulations. Regulation A+ of the JOBS Act is, in essence, a “mini-IPO.” The disclosures and accountability protect investors just like publicly traded companies do, which is why you can buy and sell stocks whether you’re a retail investor or a high net worth accredited investor.

When comparing the typical retail investment vehicles, franchise investment is an obvious choice in terms of return potential. Here are some reasons why franchises are a superior asset class:  

  • The stock market rate of return has been approximately 9.6 percent over the last 100 years, although returns can vary widely in a given year.
  • The historical bond return rate averages 5 percent.  
  • Current CD interest rates range from 0.5 to 1 percent APY, with typical investment windows of one to five years. The liquidity of funds varies by CD.  
  • Venture capital funds offer higher returns averaging 25 percent; however, this asset class is primarily available to accredited investors, and volatility in venture investment tends to be high. In fact, only about 1 in 10 VC investments have a large return.

While alternative assets often require a higher investment and involve higher risk, they can often yield returns greater than the S&P 500, depending on the investment type, horizon, and economic factors at play. Franchise investment offers the high returns associated with alternatives, with more stability using an income-generating asset that is typically found only in real estate or dividend-paying stocks. 

Inflation- and recession-resistant diversification

While those new to the franchise concept typically associate it with food service, the diversification potential within this asset class is high. In 2020, there were an estimated 753,770 franchise establishments in the U.S. Currently, there are more than 4,000 options for franchise ownership, spanning over 100 industries from fitness and personal care to home services, pet care, and waste management. Each industry sector presents a unique investment opportunity, all with healthy potential returns.

Here’s a roundup of possible returns from franchises across our favorite industries These numbers have been pulled directly form FTC required Franchise Disclosure Documents (FDDs):

HAIRCARE

  • Start-up costs per location: $336,500 to $413,500 
  • Average net profit: $111,120 (Year 3)
  • Locations: 30+ open and 80+ more sold
  • Annual location returns: 26.9–33%

FITNESS

  • Start-up costs per location: $304,082 to $705,027 
  • Average net profit: $300,979 
  • Locations: 40+ open and 300+ more sold
  • Annual location returns: 42.7–98.9%

CHILDCARE & RELATED SERVICES

  • Startup costs per location: $108,476 to $318,237 
  • Average net profit: $159,981 
  • Locations: 115+ open and 200+ more sold 
  • Annual location returns: 50.3–147.5%

PETS

  • Start-up costs per location: $265,800 to $492,500
  • Average net profit: $147,683
  • Locations: 90+ open or in development
  • Annual location returns: 29.9–55.6%

AUTOMOTIVE

  • Start-up costs per location: $297,313 to $587,860 
  • Average net profit: $378,230 (top quartile)
  • Locations: 450+ open 
  • Annual location returns: 64.3–127.2%

FOOD

  • Startup costs per location: $327,200 to $678,260
  • Average net profit: $168,924
  • Locations: 100+ open and 250+ more sold 
  • Annual location returns: 24.9–51.6%

This diversity, along with the franchise model’s ability to scale new technology and adapt quickly to in-demand products and services, makes franchising particularly resilient in times of economic turmoil. Investors are putting their money into a proven business that is primed for market entry. Franchises enjoy the benefits of a loyal customer base and brand recognition that’s been developed over many years, even decades. Because of this, it takes less time for the business to become established and begin to generate profits.

Franchises also do not reflect the negative impact of inflation in the same way as other types of assets. When inflation rises, so do the prices of goods and services that franchises sell, which leads to higher profitability and investor distributions. A more profitable business also appreciates faster, providing a long-term hedge against inflation.

The power of brand recognition

Brand recognition is one of the most powerful aspects of the franchise model. Franchise licensing offers new business owners the benefit of a turnkey experience, with a proven road map, centralized support, and standardized marketing materials and processes. Under a franchise model, both entrepreneurs and investors can mitigate the common risks associated with establishing or investing in a small business.

From a consumer perspective, franchise businesses represent a known quantity; customers know exactly what to expect of the goods and services provided, as well as the level of customer service they will receive. This brand recognition gives new franchise locations a boost in the early days of operation. It allows them to “hit the ground running” as they move toward profitability, and also helps mitigate some of the risks that would typically be associated with starting a new business.

Even though much of franchising gains success through brand recognition, many lesser known industries in franchising are still very successful. This is because of the systems in place to build these franchises in their respective industries. For example, you wouldn’t be familiar with the brand name of extremely successful commercial window washing or waste management franchises because you’re not their customer. However, for those that do use their services such as specific business owners will become customers through the forms of sales and marketing that scale those specific businesses best.

 

From inflation resistance to brand recognition to high yields and more, the advantages of investing in franchises are immense. Like any other investment opportunity, however, franchises are not without their risks and challenges. Investing in a franchise location requires knowledge on the part of the investor, as well as a functional understanding of how the franchise business model works. Investors looking for a passive income stream often run into three primary obstacles to taking advantage of a franchise opportunity:

  1. Up-front costs: Investment capital is one of the primary barriers to establishing a franchise location. Costs for licensing, real estate, materials, and fees can start at $100,000 for only the cash outlay portion of your investment. Often, franchise owners need more than $1M in additional liquid assets. Depending on your industry and location, it can take many years to achieve profitability. 
  2. Time: Traditional franchise investment is not a purely passive income model. Although running a franchise location is easier than starting from scratch with a single-location business, it is still a time-consuming process. As the franchisee, you are responsible for implementing the management and marketing plans laid out by your franchisor. Standard operations like hiring, personnel management, ordering, and scheduling all require a time investment.
  3. Operational expertise: As with running any business, operating a franchise business requires a certain level of business management knowledge. Franchise operators must be able to perform due diligence on the investment and must understand the market forces at play in establishing and running a franchise location. While the licensing agreement entitles the franchisee to benefit from branding and marketing, the success of the location hinges heavily upon the ability of operators to successfully run and promote the business. 

With these challenges in mind, many investors decide that franchise ownership doesn’t make sense for their financial situation or their lifestyle. While these investors could benefit from the financial rewards and stability of franchising, they may lack the capital, time, and/or knowledge required to run a successful franchise

Bridging that gap is what FranShares is all about. 

Most franchise investors have little interest or capacity in assuming the role of an owner/operator. This level of responsibility would require you to be involved in all aspects of the day-to-day operations of the franchise, leaving little time for other pursuits. A potential alternative is semi-absentee franchises. These are designed to be run by a manager or management team, although an owner or investor may be required to check in and occasionally assist with operations.

That said, the ideal ownership model for time-conscious investors looking to diversify their portfolios would be an absentee franchise. These businesses run with little to no involvement from their owner/operators, generating truly passive income. While this sounds like a phenomenal proposition (who wouldn’t want to build wealth without having to get another job?), a franchise with the means to be run on the absentee model is a rare find. 

Actually, it was a rare find … until we came along.

Now, with FranShares, anyone can generate passive income by investing in a high-yield portfolio of franchises, made possible by our unique fractionalized approach. 

FranShares: Fractionalized franchise investing

You may already have some familiarity with fractionalized investing, which allows pools of individuals to invest in expensive assets like vacation homes, private jets, and racehorses. In the venture capital realm, the equivalent would be a syndication, which is a special purpose vehicle (SPV) that allows multiple investors to back a single company. 

At FranShares, we’ve taken this method of ownership and applied it to franchise investing. Our approach allows both accredited and non-accredited investors from all walks of life to purchase partial ownership in a portfolio of pre-vetted, managed franchise locations with high return potential – for as little as $500.

 

How the FranShares franchise portfolio works 

FranShares invests in locally operated franchise locations alongside our pool of investors. We then act as the operator for each location and distribute the resulting recurring franchise profits to each investor.

FranShares also remains a co-owner and stakeholder in our investment portfolios. We assume all management responsibilities for our franchise locations and appoint teams who are experts at creating successful franchise businesses. This allows FranShares investors to enjoy returns on their investments while avoiding the stress and responsibilities of full franchise ownership. 

Benefits of investing with FranShares

We combine deep industry expertise with a zero-fee approach to ensure our investors maximize their long-term returns – without the risk of losing their shirts. Our mission is to help investors reap the benefits of franchise investing with a unique business model that offers:

  • Passive income
    Our best-in-class franchise management team ensures that our investors enjoy truly passive income through quarterly distributions – without managing the franchise. In other words, we do the legwork, while you sit back and enjoy the returns.
  • Flexible capital commitment
    We offer accredited and non-accredited investors the opportunity to invest for as little as $500, although our model also appeals to ultra-high-net-worth investors. Our platform allows everyday people to become fractional franchise owners with the ability to invest the right amount of capital for their own personal circumstances.
  • High-yield diversification
    Franchises are real assets with little or no correlation to the overall stock market; thus, they act as a hedge against inflation and are not subject to the same level of volatility. 

Furthermore, our fractionalized ownership approach allows investors to fully diversify their franchise holdings. Owning a portfolio of franchises across different geographies and industries creates an effective buffer against challenges that may shut down a single franchise or location, such as service franchises closing temporarily during pandemic lockdowns.

  • Low risk
    FranShares only invests in recession-resistant franchises with a track record of success to minimize volatility and give our investors peace of mind. We perform all due diligence and thoroughly vet each franchise partner for strong brand recognition and market positioning.
  • Government-regulated
    The franchise industry is regulated by the FTC and as a registered investment vehicle, FranShares is regulated by the SEC. The FTC requires full disclosure of each franchisee’s background, financials, and performance. In addition, we provide our investors with reporting and regulatory compliance documentation above and beyond what these regulators require.
  • Zero fees
    Traditional investment vehicles charge at least a 1 to 2 percent asset management fee – and that can significantly cut into your returns as an investor. But because FranShares participates in every fund, we are able to waive all platform fees and pass along those benefits to our investors. 

Our profits come from co-investment in franchise locations as well as brokerage commissions from the franchisor, not the fund. This approach both preserves capital for our investors and creates parity in the investment opportunity.

Investors have long thought of franchise ownership as a preferred method of achieving stable investment portfolio diversification. It offers high-yield returns, a predictable investment timetable, and resistance to both inflation and recession. The franchise model also offers a safe, low-volatility investment vehicle that is carefully regulated.

If you’re an investor who wants to add these features to their portfolio, while simultaneously generating a truly passive stream of income, FranShares is your ideal partner.



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