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Return on Investment

How FranShares selects franchises

July 28th, 2022 By Emily Norwood

As with any investment, franchise opportunities are not all created equal. With more than 5,000 registered franchise brands in the United States alone, it can be daunting for new investors to choose a franchise investment.

Part of the challenge in selecting the right franchise to partner with is understanding the overall franchise model and the conditions that lead to success for the franchisee.

In this article, we share some of the features and indicators we look for when selecting franchise opportunities for our fractional franchising investment offerings. Shedding light on the investment rationale can help our investors better understand the vision and value proposition for investing in this powerful alternative asset class.

Why Choose Franchise Investing?

Franchise investment has long been a preferred, low-volatility option for wealthy investors. Among the many benefits of choosing franchises to diversify your portfolio, the top three benefits focus on investment stability, even during uncertain economic times.

Proven Model: Franchising as an industry has had decades to iterate and improve the investment model. When investing in a franchise business, franchisees benefit not only from brand recognition (although many franchises are well-known and trusted names in a community) but from systems. For example, most home painting companies are franchises. But you wouldn’t recognize the brand name unless you’ve had to look for the service before. They have systems in place to attract clients, provide excellent service, and grow the business. The franchise model relies on the systematization of a proven business. A franchise gives the investor the tools and training to perform optimally within local conditions.

Return Stability: Franchise investment tends to offer a more stable alternative than other asset classes. Venture capital investing, for instance, offers potentially large returns – along with the downside of return uncertainty. According to data from the VC firm Correlation Ventures, two-thirds of funds fail to return 1x capital, while only 4 percent return 10x the investment. 

In contrast, franchise investment offers its investors well-documented and predictable return outcomes. Franchises are required by the FTC to provide franchisees with a financial disclosure document (FDD), which often outlines the financial performance of the franchisor’s current locations.

FDDs can help potential investors gain a better understanding of the historical performance of franchises they wish to invest in, as well as help them predict potential future performance.

Inflation Resistance: With inflation reaching a nearly 40-year high of 9.1 percent (as of June 2022), the long-term inflation-hedging potential of franchise businesses has never been more attractive.

When inflation, and therefore cost of goods rise, so do the prices of goods and services that franchises sell – which tends to lead to higher profitability and investor distributions as the franchise raises prices. A more profitable business with systems in place also appreciates faster, providing a long-term hedge against inflation.

It’s worth noting that for franchises, high yields are not simply a product of an inflationary period; they are a regular feature of the asset class. Investors are putting their money into a proven business that is primed for market entry. Franchises enjoy the benefit of a loyal customer base and brand recognition that’s been developed over years or even decades. Because of this, it takes less time for the business to become established and begin to generate profits.

What Gives Fractional Investing an Edge?

Despite its numerous benefits, franchise investing presents several drawbacks that keep everyday investors from participating in this beneficial asset class. High initial investments, time-intensive start-ups, and a substantial learning curve keep many investors from considering a franchise investment.

With a fractional approach, however, retail investors can enter franchising with achievable investment amounts, time freedom, and guidance, which collectively create more opportunities for first-time, casual, or expert investors. 

Top reasons investors look to fractional investing of all kinds, from wine to art to real estate to a diverse variety of other assets:

Low-Barrier Portfolio Diversification: Fractional investing offers a safe avenue to diversify investment portfolios. Rather than investing $500,000 or $1,000,000 in a single location, investors can benefit from a portfolio approach, spreading industry and geographic location diversity.

Passive Income: Portfolio investment is a passive form of investing. Whereas full franchise ownership requires time for training, setup, and running daily business activities, a fractionalized portfolio of franchises allows investors to participate in a well-managed fund on a passive basis.

Expert Management: Fractional franchise investors benefit from decades of franchise expertise provided by a team of knowledgeable and dedicated investment managers. Many management teams have experience running and growing single- or multi-location franchise businesses. Being able to rely on the strength of that knowledge allows franchise fund investors to be confident in the projected results of their funds.

The FranShares Selection Process

FranShares pursues every franchise opportunity using a systematic due diligence process. Investment teams evaluate franchise businesses for potential fund inclusion using specific metrics. In general, our selection process proceeds as follows:

Meticulous Screening and Selection

FranShares investment team sources franchise opportunities from leading industries, such as personal services, home improvement, education, and healthcare. The teams spend considerable time pre-qualifying investments and evaluating potential franchises. At FranShares, our investment team is highly selective and chooses less than 1 percent of the deals that come across our table to offer to our investors.

Rigorous Due Diligence

After initial qualification, franchise investment teams dig deep into the financials and operating documentation for potential franchise businesses. By applying extensive franchise brokerage knowledge to our due diligence process, we can ensure the franchise brands we include in our funds meet a high bar in terms of operation and profitability. 

Some of the additional checks we perform during a due diligence process include:

  • Performing a legal FDD review. 
  • Conducting site visits to current locations.
  • Meeting with Franchise brand executive teams.
  • Speaking with existing franchisees. 

Competitive Pricing

Our goal is to operate on a bulk franchise purchase model, meaning we will invest in not only one or two franchise locations but dozens or hundreds simultaneously. Investing in bulk will allow us to secure competitive pricing for franchise agreements, which lowers the overhead costs of running our locations for fund investors.

8 Components of a Winning Franchise Investment

These eight factors play the most significant role in our decision on whether (or not) to include a franchise business in an investment fund.

Return on Investment: FranShares examines the franchise disclosure documents and reported financial disclosures that are required by the FTC. We select brands with a proven track record of profitability.

Growth: Next, we evaluate the speed and growth of the franchise brand. This involves examining not just the gross number of locations. We also look at the total growth of location numbers, the performance of individual locations over time, as well as turnover, transfers, repurchases, and liquidation of all franchise locations. We pay particular attention to the growth of new locations.

Availability: The best franchise in the world can’t help you succeed if the territory is unavailable or a market without growth potential. We look for franchises that are in growth mode, with ample room for expansion and low market saturation to reduce the potential for internal competition. We look for any territory restrictions that would inhibit our ability to grow within the franchise brand. 

Leadership: Once we are confident in the numbers, we look at the people. Franchises live and die on the quality of leadership and the support a franchise brand provides to its franchisees. We take time to learn about the key decision makers within the organization and conduct due diligence into their history within the franchise industry.

Sustainability: Supply chain sustainability is critical in the post-pandemic investment ecosystem. We look for franchise opportunities that offer sustainable, resilient operations. A high focus on sustainability ensures stable returns as economic conditions evolve.

Recession and Pandemic Resistance: We seek out new franchise opportunities within traditionally recession-resistant industries. In light of the global impacts of the COVID-19 pandemic, we look for deals that can weather any storm, including large-scale public health disruptions.

Competition and Competitive Advantages: We look beyond the franchise brand itself to understand how it fits into the larger picture of market industry leaders and competitors. We pay special attention to the “secret sauce” that differentiates brands and commands market share. 

Manageability: Not every franchise business has an operating model that’s suitable for inclusion in a fractional fund. We look for opportunities with low overhead and streamlined operations that can benefit from our portfolio management model. Manageability is an important factor in ensuring returns for our fund investors.

What About Our Operators?

Our franchise businesses are an essential part of creating successful funds, but they’re not the only part.

At FranShares, we will borrow from what private equity firms have been doing for decades in terms of managing franchise locations. Depending on the deal, we’ll either work with a reputable, experienced outsourced management company like Restaurant Sherpas, or leverage our internal expertise to hire an in-house management team and advisors. There is no shortage of franchise management talent in our team’s network.

When hiring an in-house management team, we plan to carefully select team members based on their background and track record of success in launching and scaling franchise businesses. In general, management teams must meet all these criteria:

Prior Management Experience. Many of our operators entered the franchise industry as location managers for professionally managed franchise businesses.

Franchise-Specific Expertise. We expect our operators and management teams to have real-world experience and possess specific franchise business industry knowledge that sets them apart from other generalist business owners. Our operators understand the value of franchise systems and the specific steps necessary to launch and scale locations.

Cross-Industry Knowledge. We look for managers and location operators who understand franchise operations across market segments. In some cases, our management professionals have experience running multi-brand franchise organizations. They understand the value of complementary business expansion, as well as cross-marketing, which makes them ideally suited to the management of a diversified franchise portfolio.

Level Up Your Investment Portfolio with FranShares

Fractional franchise investment is opening the door to a new chapter in wealth-building for investors of all kinds – and that means the time has never been better to diversify your investment portfolio with the opportunity for stable, predictable returns. 

To learn more about how we evaluate franchise opportunities and structure funds for our investors, use the link below to sign up for FranShares and review our offerings. 

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