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Investing in franchise stocks vs. franchise ownership

January 24th, 2024 By Emily Norwood

Savvy investors have been reaping the benefits of franchises for years. 

And who can blame them? There are somewhere between 750,000 and 800,000 franchise establishments in the United States, generating upwards of $800 million. Who wouldn’t want to get themselves a slice of that economic pie? 

If you’ve considered jumping into the franchising game, there are now more ways than ever to get started.

The benefits of franchise investing

The main appeal of franchises lies in their low volatility and high potential returns. This has made the franchise model a perennial favorite of sophisticated investors looking to diversify their portfolios and income streams in the long term. 

The franchise model’s ability to scale new technology and adapt quickly to in-demand products and services makes it particularly resilient in times of economic turmoil. Unlike other types of assets, franchises don’t necessarily reflect the negative impact of inflation; in fact, it can actually lead to higher profitability and investor distributions. 

A more profitable business appreciates faster, providing a long-term hedge against inflation.

Different types of franchise investing

It’s important to note that not all franchise investment models are the same—you can own a franchise or you can trade franchise stocks. 

Knowing which model is the best fit for you depends on a number of factors, including your current financial situation and goals for the future, both monetary and lifestyle-related.

Let’s examine each.

Publicly traded franchise stocks

Investing in franchise stocks is an attractive option for many retail investors. These stocks are typically very accessible, trading on all the major stock exchanges, and provide an opportunity to diversify your portfolio without requiring the large capital commitment of direct ownership. 

In terms of stability, franchise stocks often demonstrate less volatility even during market downturns, which can help protect against significant drops in overall portfolios. A well-managed stock portfolio may end up generating steady returns that can then be reinvested to sustain gains in the long term.

Franchise ownership

There are three kinds of franchise ownerships: hands-on franchise ownership, semi-absentee ownership, and absentee ownership. Let’s examine each.

If you have an entrepreneurial streak, direct franchise ownership can offer an appealing turnkey experience. Franchises are, by design, proven businesses that are primed for market entry.  Becoming a franchisee means you’ll enjoy the benefits of a loyal customer base and brand recognition that’s been developed over many years, even decades. Also, franchises offer various financing options. This can provide additional flexibility for startup costs, which can be considerable depending on the industry. All these factors drastically shorten the runway for your business to begin generating profits. This makes outright ownership an attractive option for those who want to become their own boss without having to go through the process of starting up their own business.

The semi-absentee ownership model is for the franchise investor who has 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, which 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.

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, a franchise with the means to be run on the absentee model is a rare find – at least it used to be. (We’ll come back to this in a minute.)

Your two choices: franchise stocks (traditional assets) vs. franchise ownership (alternative asset)

Traditionally, those looking to invest in franchises were stuck between two unideal options: buying stocks on the exchange or becoming a franchisee. While both methods have their advantages and disadvantages, neither emerges as a clear winner over the over.

Franchise stocks as traditional assets

Traditional assets are stocks, bonds, and cash. Anybody with enough cash to buy a share can be a franchise investor—that’s the idea behind franchise stocks as traditional assets.

The benefits and challenges of investing in franchise stocks as traditional assets are more or less equal to other kinds of stocks. You have to tolerate your risk for market volatility, see your investment as something that takes time to grow dividends, and generally accept standard returns.

Franchise ownership as an alternative asset

Franchise ownership, however, can be classified as an alternative asset. Since it’s owning a business and business ownership isn’t constrained in the same manner as the stock market, it’s possible to see much higher returns, for much faster, from franchise ownership. 

Of course, this comes with the major caveats that franchise ownership isn’t a passive endeavor: you’re owning a business! Likewise, there’s a high bar to entry with franchising, as many franchises require average initial investments of half a million dollars or more. While financing is available to help you reach that milestone, the golden rule of investing applies: don’t invest if it’s not money you’re able to lose.

Fortunately, there’s a better option.

A third option: fractionalized franchise investing with FranShares

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. There’s no need to dive into day-to-day operations or spend hours analyzing the latest trades on the Nasdaq. Our approach allows investors to purchase partial ownership in a portfolio of pre-vetted, managed franchise locations with high return potential – for as little as $500.

This is the best of both worlds, as you’re able to capitalize on the passive nature of traditional franchise stock investing while enjoying fractionalized monetary returns benefits of 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.
  • Equity appreciation
    The value of your franchise investment may increase over time and may provide secure, long-term passive income.
  • 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.
  • Diversification
    Diversify away from the stock market and other publicly traded assets while owning a portfolio of franchises across different geographies and industries, which 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 volatility
    Unlike other assets, which may experience considerable fluctuations due to investor sentiment, the growth in value and disbursements from franchise investments are determined over the longer term by the business operations of the franchises.

Ready to add franchise investing to your portfolio?

If you’re an investor who is looking to incorporate alternative assets into your strategy, investing fractionally with a FranShares franchise portfolio offers high earning potential and diversification in a completely passive model.

To learn more about FranShares and this unique opportunity, sign up for our platform on our home page.

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