Based on years of franchise investing expertise, we use a variety of criteria to select which franchises to invest in.
Return On Investment (ROI): At the federal level, franchising is regulated by the FTC through its “FTC Franchise Rule”. As part of that regulation, franchises must disclose their full itemized startup costs. Additionally, although not required, franchises may disclose a Financial Performance Representation (FPR) of their locations. These may come in the form of gross revenue, net profit, number of customers, etc. FranShares, however, prefers to only work with franchises that show net profits in their FPR so our investors can have a better understanding of potential returns. We tend to avoid franchises that have high buildout costs, employee headcounts, and inventory to maximize ROI.
Growth: FranShares looks at each franchise’s growth per location store sales and number of franchisees to ensure the brand is growing.
Availability: While most people think of major fast-food franchise brands when thinking about franchising, the availability of new locations is limited-to-nonexistent in good markets. FranShares looks for growing franchise brands that have availability for multiple locations in good markets.
Leadership: As part of FTC disclosure regulations, each franchisor’s leadership must be disclosed. We look for experienced teams based on their involvement in their franchise’s industry and in franchising as a whole.
Sustainability: While they may not always be the “sexiest” businesses, FranShares looks for those that are more essential services that have great long-term outlooks. We avoid quick fads and stick with staples like haircare, automotive, fitness, etc.
Competition and Competitive Advantages: Franchising does not make new industries but instead consolidates existing ones. We look at who the other competitors in their respective industries are, whether they are growing, and what our franchises’ competitive advantages are to capture market share in the space.
Manageability: Many franchises require a full-time owner and operator. We focus on semi-absentee franchise models that can be manager-run, which typically have lower employee headcounts and simpler operations. We also add an extra layer of management, which is typically not found in these franchise models to have top-of-the-line efficiency in operations.
Recession and Pandemic Resistance: No one has a crystal ball that can reveal what’s going to happen in the future and what to invest in. Instead, we make educated investment decisions to prepare as much as possible. We look at essential and need-based industries that tend to perform well in all economic conditions and have a history of performing well in the previous recession or COVID lockdowns.
Franchise ownership is a long-term investment. While we will have a secondary trading platform in the future to help facilitate liquidity, we strongly suggest holding FranShares for 5-7 years or longer.
Each offering has different circumstances depending on the type of investment. For an income offering, we would hold the portfolios indefinitely. For a growth offering, we would hold for a minimum lifespan of five years and expect to sell them in the 5-7 year time span with the permission of the franchisor. This will essentially be a liquidation of the portfolio and we will pay each investor their pro-rata portion of the buyout price. We then encourage investors to diversify their holdings by reinvesting in several other FranShares funds.
At FranShares, we’ll be taking a page from the private equity book of franchise management to ensure our offerings maximize returns.
Depending on the offering, we’ll either work with a reputable and experienced outsourced management company like Restaurant Sherpas, or leverage our internal expertise to hire an in-house management team.
405 W Superior Street, #93Chicago, IL60654
(1) Portfolio IRR projections are calculated using all cash flows, including the initial investment of $25,000,000 of offering proceeds, annual earnings before interest, depreciation and amortization (“EBITDA”), less estimated corporate taxes, and the sale of the entire portfolio at the end of the fifth year at 5x EBITDA.
(2) Cash Yield projections are calculated as the arithmetic mean (average) of five years of annual cash flows (including EBITDA, less estimated corporate taxes) divided by the initial investment of $25,000,000 of offering proceeds.
(3) Equity IRR projections are calculated using the initial investment of $25,000,000 of offering proceeds and the sale of the entire portfolio at the end of the fifth year at 5x EBITDA.