Let’s Grab Coffee Podcast interview: Earning passive income through franchise investing
Podcast Transcription
George Khalife:
This is the Let’s Grab Coffee Podcast. And I’m your host, George Khalife. Kenny, thanks again for being on the podcast. Long overdue. Big fan of yours, especially in the Chicago startup ecosystem, and a big fan of fractional investing. You recently founded and are the CEO of a company called FranShares. So it’s basically an investment platform that lets anyone diversify their portfolio, earn passive income through franchise investing. I mean, I think that from a first impression, when you hear that, it’s a bit of like, “Wow, this exists in the market?” So definitely excited to have you on. And yeah. Thanks for making the time.
Kenny:
Great to be here. I love the Chicago pride. And yeah. It’s awesome to be here too. And I love seeing everyone really understanding and just getting it. A lot of people are like, “Why hasn’t this been here before?” I’m like, “Thank you. That’s what I want to hear.” And so it’s awesome to see all the traction we’ve been getting already.
George Khalife:
Maybe we’ll start there. Why is it the fact that most people either don’t understand franchising or maybe have lost the momentum of what it actually means in today’s ecosystem?
Kenny:
That’s because honestly, most people just think of it straight as fast food and they’re imagining like, “Oh, if I get a franchise, I’m working behind a counter to a fast food place.” And that’s because really it’s essence, franchising’s about replicating a business system, not just a brand, logo, or food. But when you’re replicating a business system, those franchises have to support you in the ways that make your business most successful. And in food, the most competitive industry alive, you have to be the biggest in marketing. So all the food franchises market more than any other franchise. And so that’s why people, been synonymous with food and franchising.
George Khalife:
Right. They think franchise, immediately McDonald’s comes up. And I heard you speak about this on another podcast, I think, but it’s certainly not the most efficient. So I just love for you to describe that to folks who, when they think of franchising, they think of a McDonald’s, but why, if you wanted to hypothetically be a franchise owner, that might not be your best path forward financially speaking.
Kenny:
Yeah. Honestly, I’ve steered people away from fast food for years because again, that’s what they initially think of. But when you’re looking at starting a franchise and you look at the fast foods of the world, they have the highest startup costs, the thinnest margins, the most employees with the highest turnover, and the most competition. It’s literally one of the worst ones you could go into. If you’re going to do food, do a quick service restaurant type thing. You’ll have higher margins and less employees there, but it’s still just… I mean, I’d always tell people, especially when I get an initial call like, “Hey, I want to buy McDonald’s.” I’m like, “Why?” And you start to ask people why they actually want it. The other day, it’s like, “Oh, they’ve heard of it. And they want to make money.” I’m like, “Yeah. There’s a lot of other franchises out there that accomplish that for you.”
And even to use Supercuts as an example, it’s like, you don’t have to buy a bunch of fryers and vents and ton of employees. You can get five Supercuts for the cost of one McDonald’s. Why not spread it around then?
George Khalife:
Yeah. That’s interesting. I don’t think a lot of people maybe think about Supercuts as a potential franchise, right? Maybe it’s also because they put so much value in the weight of the brand to carry them forward. But they discount, to your point, how much work is involved, how much capital up front is involved to actually you make that a reality.
Kenny:
Yeah. I mean, even besides that, it’s just the business system. People are thinking it’s all about that brand name, but the vast majority of franchises, you wouldn’t even know that they’re a franchise. You’ve never heard their name before, but when you need that product or service, they’re there for you. And you could be… Let’s use a gym as a good example. You could be the best gym trainer alive, but then when it comes to starting a business, well now you’ve got to deal with HR, marketing, finance. It just really goes on and on. Anyone who’s started a business before can tell you just being the expert at one part of it is not going to make you a good business owner. And so that’s why it’s really important to have all these different systems in place because that’s how you become a successful business owner in the long-term is handling all these different parts of the operation, not just, “I give a great workout.”
George Khalife:
Yeah. Well, before we move forward, I just wanted to set the tone for everyone in case there might be different levels of knowledge here around franchising. And I think a lot of people might know the definition or might know exactly what we were just talking about, but not really the intricacies. So as a former franchise consultant now really in this space trying to disrupt it from a tech perspective, can you just lay the land in terms of what franchising actually is?
Kenny:
Yeah. So franchising is the ability to purchase the rights to a business license and replicate the business systems in place. Franchising’s over $750 billion in the US GDP every year. So that’s about three and a half percent of the economy. Covers over 4,000 different brands in over 100 different industries. I’ve seen everything from the traditional more food, fitness, hair care, automotive, all the way to waste management, window washing, custom tailored suits. They have franchises for everything. And so really it’s the way to buy a business in a box and be a business owner with taking all the guesswork out of like, “How do I make this great product or service and make customers happy and make money at the end of the day?”
George Khalife:
Yeah. I didn’t actually realize… So I went through the Sandler training for a year, the sales. I don’t know if you’ve ever come across it. Actually, I think they are a franchise as well. [crosstalk]-
Kenny:
They are [crosstalk]. I’ve worked with Sandler for years. Yeah.
George Khalife:
Yeah. They’re awesome. And I remember in Toronto, the first time I ever did it, I asked the owner. I’m like, “So are you the founder of Sandler?” He’s like, “No. They’re actually out in the US. I have the right to use their resources, their brand, their recognition and whatever, and their system, their methodology, I should say, but run it through my own practice in Toronto.” [crosstalk]-
Kenny:
Yeah. Exactly. Because they’ve been a franchise that’s around forever. And yeah, a lot of people know them. They’re a great service, but vast majority of people have never heard that name before. And they’re like, “Well, I haven’t heard of it. Is that a good business?” It’s like, “Yeah. Those guys make incredible money.” And also it proves the point of you could be an amazing salesperson, but going from that to sales training and making that a reputable class and system that’s efficient for everyone… A lot of times, people are good at sales just cause they’re very charismatic. It’s like, well you can’t train that. Sandler has a sales system that you can train other people and also how to replicate it across different parts of the country and world. So that’s perfect example of franchises people aren’t aware of and the use of it.
George Khalife:
Yeah. And to your point, the benefit is instead of going through the months, maybe the years of creating the brand image, getting people to know you, defining your value prop, there’s already a model that works, and you can take your personal experience and grow a business through that. What made you fall in love with franchising? Because what’s interesting about your history is you’re not just a guy that fell into starting FranShares just randomly or because you saw a pain point. I mean, I’m sure you did, but you have baggage in this. You’ve rolled up your sleeves. You’ve been in it throughout the years too.
Kenny:
Yeah. I’ve been in the industry about 10 years now. And funny enough, growing up, I lived in Colorado for five years in a town that didn’t allow franchises to be there. So I was very far-removed from the franchise world. And then right after college, I got into finance and I was a advisor at Merrill Lynch, and I realized how competitive that is, how also old school. I was doing it in San Francisco. Robo-advisors were coming out and I’m like, “This is not going to be a good, long-term thing.” And I wanted to see what else was out there. And a family friend… Actually, speaking of franchises for everything, he was the CEO of a company that coaches CEOs. So I was like, “Oh, great person to get a referral into a new industry for,” and he’s like, “Well, what do you know about franchising?” And I’m like, “The hell do you know about franchising? My company’s a franchise.” “Are you serious? There’s a franchise for coaching CEOs?” He’s like, “There are franchises for everything.”
So I got into a… You called it franchise consulting. I call it franchise brokerage. I think consulting is a nice little lovely term they put in front of it to mask what they actually do, but it’s like, I was a broker. And so I’d help people understand franchising, understand their goals, their skillset, their budget, recommend specific franchises to explore and coaching through that research process until they found the right one.
So yeah. I did that for about 10 years before I started FranShares. I had the idea for FranShares about six years ago though. I remember Fundrise doing their Series A and I was like, “Oh, I’m going to do that for franchising,” and spent years of planning to get a go. I wanted to start my own company first. I started my own brokerage the last five years or so. And honestly I got pretty comfortable in that. And then I read an article early pandemic that people were gambling on the stock market sports [inaudible]. And I was like, “Whoa, I’m late to the party.” I literally just shut the other company down and started getting FranShares going.
George Khalife:
Why the delay for the past five, six years? What did you feel was the resistance to get that started before?
Kenny:
There were a couple of things. For one, like I said, Fundrise just did their Series A. This whole fractional investing space was still very new. And it felt like they were new. They were dealing with an uphill battle. There was people accepting what that means. There was also me as a person being fundable. I’d already been in the franchise industry for five years, but I was still young. I hadn’t owned my own business. I was part of the world’s largest brokerage. And so I did business development all the way to taking over most of Valley County. But to me, that’s not fundable enough. That’s just a guy with experience. And so I moved out to Chicago and started my own brokerage and really just wanted to make myself the thought leader in franchising.
And so I started writing on Quora originally and eventually Quora sent my answers out to 40 or 50 million people. I got featured in Forbes, ABC, Business Insider. So I reached 300 million people without any ad spend. So those were the type of things I was trying to accomplish was build myself as a business owner, learn how to be very thrifty and lean with a budget, and get that thought leadership there and actually reminded me to what you were asking before about how I fell in love with franchising.
When I was introduced to it, I realized that everyone knows about franchising. No one knows anything about it though. It’s incredibly hard near impossible to find someone who’s never heard the word franchise or has a general understanding what it means. And so when I heard that like, “Oh no. You know nothing about it.” I’m like, “Wow, that’s a big industry for most people to not know anything about. I want to go hop in there and make some changes.” That’s letting people try and look at what’s already happening and start a business. I’m like, “No. Look for what’s… they’re complacent in the world and shake things up. Go become an expert in something no one else is.” That’s how I got funded for this is that people were like, “Wow, no one could start this but you.” I heard that from most investors.
George Khalife:
Yeah. Well, because again, you have the right background. But actually, I really appreciated you saying the fact that you waited a little bit until you were more ready. You don’t often hear that, especially with entrepreneurs and startup founders. It’s just a rush to… because of timing. And it’s understandable, right? You want to get to market with your idea as quickly as possible, but you also want to take the stair sometimes to build that calf muscle versus just taking the escalator, right? I think that gives you more of a base to stand on.
Kenny:
Yeah. It also really depends on your situation and what you’re doing. For me, I knew being in the franchise industry, I’m like, “Well, most people in it, they’re very siloed into what their specific franchise or part of the franchise world does.” They don’t really look around and say, “What else can be changed?” And also they’re usually several, several decades older than me. And I was like, “Okay. I’m very confident that no one within franchising is going to think of this or be able to do it right.” And then also, no one outside of franchising could figure this out, how to do it right. So I was taking a gamble in that I knew what I was doing and what it would take, and just patience. So luckily it’s paying off.
George Khalife:
Yeah. Of course. And I also love the fact that you spent so much time building the community before your venture. I think a lot of people can learn from this man is instead of waiting to start your marketing around your brand and how you can be of value day one, when you start your business, think about that way before because you never know what that can internalize into. For you, it was franchise, but could have been maybe your personal brokerage or your consultancy. The Quora I think was really cool. The question I actually had for you… I was going to leave it till the end, but I guess because we jumped into it. You mentioned, I think you were the top… Weren’t you the top-rated content producer around franchises on Quora? I think that was-
Kenny:
I might still be. I don’t know. There’s a lot of over… But yeah. I was definitely the top writer on there for three years, I think.
George Khalife:
Yeah. At some point. So what was the most viral piece of content that you wrote?
Kenny:
How much does a Chick-fil-A cost?
George Khalife:
Interesting.
Kenny:
Do you know how much it costs?
George Khalife:
Like the franchise itself, you mean?
Kenny:
Yeah.
George Khalife:
Actually, I’ve never looked into it, but if I had to spitball, probably half a million to 750-something.
Kenny:
So if you were to do it all outright, it’d be about a million and a half, but it actually only costs $10,000 to own a Chick-fil-A. Basically what they realized years and years ago was that, “Hey, the people who can run these the best are the ones who start from within. They start at minimum wage. They’ve worked their way up and they know this inside and out.” So they said, “Why don’t we finance everything?” $10,000 to someone who started at minimum wage. It’s as much to them as someone coming off corporate. And basically it’s a great hybrid model where they give them a amazing salary, great pay for performance, and then they get a kicker if they ever want to end up selling it. They don’t own the full equity, but it’s a really great hybrid model.
And so when I put this out there, it was amazing because what Quora does is when you write an answer, they’ll send it out to a couple of people or it’ll appear in their feed and they see how engagement is, just like most social media things. But then as they see the engagement is good, basically people get their daily emails from Quora. It’s the Quora digest. And so they see based on what engagement is for answers, what people like, they’ll send it out to more people. And as the writer, you get a notification on your phone when they send it out. So I got one like, “Hey, we sent your answer out to 1,000 people,” and I lost my shit. I was like, “Oh my gosh, this is so cool.” I was freaking out.
And then I think a day later it was like, “We sent it out to 5,000 people.” Oh my gosh. And then it just kept snowballing all the way until the last one they sent was, “We sent your answer out to 20 million people.” I was in an elevator. I don’t even think I got off my floor. I was like, “What just happened? Amazing.” And it was funny because a couple of months later maybe, I was reading The Hustle, the daily newsletter. And one of the day ones, they said, “Hey, we’re looking for people who know anything about Chick-fil-A for a Sunday story we’re doing.” And I reached out and I was like, “I know some stuff about there. I actually wrote about it before.” And eventually they’re like, “Hey, we’d love to talk to you.” “Great.”
I hop on with Zach Crockett, the lead writer there. And he’s like, “This is crazy. You’re actually the person I wanted to talk to. I had your answer open in another tab here. Perfect.” It was just serendipitous there. And that ended up being The Hustle’s, one of their top 5 or 10 performing articles for the entire year. So it worked out really well. And also that really took on to part of what we’re doing with FranShares is that the Chick-fil-A model of ownership is something I want to bring to pretty much every franchise that we work with. I think there is something missing in the industry and I think there’s ability for creating the ladder for people who start minimum wage, especially there’s a huge generational wealth gap with minorities and disabled veterans. And so instead of just starting a minimum wage job, I want them to see the way up.
It’s not just, “I start this, I get a couple of hours, and I get out.” It’s, “No. Well then, you can become a manager, then you can become an owner. Then you can eventually own a portfolio and we got FranShares corporate.” So I want it to be something where people can start anywhere and keep moving up. So I think again, serendipitous, for sure.
George Khalife:
Yeah. Wow. That’s a really, really cool story. I’m going to actually check out this article after this podcast. But speaking of FranShares, for people who are curious, maybe never came across the website so far, I mean, it’s close to launching. I’ve been on the wait list for some time. I feel like I’m one of the OGs.
Kenny:
I appreciate you.
George Khalife:
I don’t really know where I am on the list, but certainly when it first came out. Yeah. Walk us through just the model really quickly, how it’s going to work, how much people are going to have to invest, the hold times, everything that you think, like the five FAQs that you think anybody would want to know, basically.
Kenny:
Yeah. So FranShares lets anyone invest into an entire diversified portfolio of franchises. So you get to invest into franchise ownership that provides this passive income. You get the equity. It’s a hedge against inflation, diversified from the stock market. And when you invest in it, you get diversified by different geographies, different industries and different brands. And then you’re paid dividends based off the performance of all the locations within the portfolio. It’s like having your own real estate portfolio. And you can invest as low as $500. And really, we don’t have a max. We have everything from family offices to institutional capital investing. And so that’s the really high level of it. But I’d say things that people really like about it is I think liquidity’s always a issue.
And I got to put my SEC cap on and say by law we can’t guarantee liquidity. But what we are doing is making sure we help facilitate it as much as possible. So we have a trading platform that’ll be ready for you, and also, part of us continue to grow the wait list all times that people could make it into the first fund. I want them to be able to be ready and prepared for when shares do get listed on there. And we’ve got over 29,000 on the wait list right now. And realistically, we’re going to get maybe 2,000 investors in the first one. We’ll have another fund coming up later this summer, but I’m excited to get it launched for everyone, especially when they get to see what’s in the fund, they are going to love it. Again, people think they know about franchising. I’m going to really open that up, open their minds a bit.
George Khalife:
Yeah. Well, the other thing that I really liked about this, and the other component that I think has been hurting a little bit, the fractional investing side, is the fees, right?
Kenny:
Oh, yeah.
George Khalife:
I’ve tempered with Vinovest. I enjoy the wine aspect of it, just a cool concept for me. I just wanted to also do it to dabble into this whole new world of alternative investing. Can we just talk about… because I think that very big differentiator for you guys.
Kenny:
That is. Yeah. Don’t know how I skipped that. But basically what I was looking at when putting this together was that if you charge fees, you tend to lose the game. Loot at the growth of Robinhood and the top complaints of any of the similar type fractional investing models. And so what we thought of is how can we make money in other ways? And so there’s a couple of different ways that we do, but the short of it is we don’t charge our investors fees. Instead, what we do is, well, first off, we actually get a commission from the franchise orders. Coming from my background in the brokerage industry, if someone worked with me or they went directly to the franchise, it was the exact same investment. You were paid by the franchisor.
So with what we’re doing with FranShares, I realized, “Well, why don’t we have FranShares be the broker and the fund be the franchisee? They would’ve paid these commissions out anyway and it doesn’t affect our investors.” So basically we get that and honestly just reinvest it right into the fund ourselves. So basically we get to own a couple of percent of the fund. We throw some more money of ours in. So in general, we like to be 20% owners, but really depends on the economics, anywhere between 5% and 20%. And so we make money in the long run by partnering in and co-investing into the fund.
Frankly, the numbers show you make more money in the long run doing that. And also, it makes people happy. There’s not really a downside to it. So yeah. That’s how we came up with it. And honestly, people have been loving that aspect of it.
George Khalife:
That’s really cool. And are you outright owning the franchises yourself or are you also just co-investing partially?
Kenny:
So we actually own them outright ourselves. There’ll also be different ways we do it in the future because basically, the way I see it is that investing into existing franchises, especially if they have less than 20 locations, they come in two flavors. You have good franchisees and bad. If they’re good, they don’t need your money. They can go to a bank and say, “Look at my profit and loss statement,” and bank will give them a loan. And then if they’re bad, well, we got to figure out what are they doing wrong, how they can fix it, hope they’ll actually implement what we’re saying. There’s too much risk for investor dollars for my appetite.
So what we do instead is very much like you find in real estate, especially REITs, real estate investment trust, where we will source all the money together, deploy it into new locations for existing brands. So we look for ones that already have a couple of hundred locations opener in development. And then we actually set up our own operations. And so we do this using the private equity model or what celebrities and athletes do. Shaq doesn’t go into all those franchises he owns. But instead, they either hire a franchise management company, like a property management company in real estate, or they’ll go out and build their own teams. And you can go build an all-star franchise management team because frankly, most of them are [capted] the couple of locations they would manage anyway. And owners don’t like to invest into the people as much as they should. And then, yeah. So then with all that management in place, as we continue to grow and cash flow, all the proceeds in the cash flow go back to the investors. So yeah.
George Khalife:
The one thing I just wanted to ask you too, I feel like this might come up, especially because it’s a blend of the alternative investment, but also with a tech startup. And I thought about this with Vino as well when I first invested. And I had Anthony, their founder, on the podcast as well. But I was curious. I guess maybe question people might ask is the whole time is 5 to 10 years, which for some people, especially who let’s say have been more [inaudible] the public markets, a little bit longer. And to some, it’s actually consistent, right? That’s usually their hold times. But let’s say 5 to 10 years. What happens in the foresight of, let’s say 10 years from now, what FranShares looks like? Because there’s no visibility, right? Does that ever come up as a question of resistance in terms of the tech growth up, which is FranShares that’s managing the portfolio that you’re holding for the next 10 years?
Kenny:
Yeah. I mean, it doesn’t really come them up, to be honest, because there’s a lot of large, large, large scale franchisees that own hundreds and hundreds of locations. And so this is something that I feel is very normal. And part of our business plan going forward is managing these locations and making sure they cash flow as much as possible because again, that’s how we make money too. But it’s part of what I was actually about to touch on in the other question too, about when you were talking about existing versus other franchises, we don’t want to be too operationally intensive into too many different brands and locations. So a lot of what we’re doing in future funds too, is investing into these large scale franchisees that are looking to expand.
So they might already have 100 locations. They want to go acquire 20 more. So then you’ve got a great idea of what’s already cash flowing, the numbers look like. And so that’s where we can quickly invest but also not be as hands-on. And so when you look at the future FranShares, it’s like, well, yeah. It’s a lot of money deployed into these other large scale franchisees, but then only a handful of these growth and income funds like this, where we actually started up because you’re going to get a lot more equity growth in this type of fund versus when we invest into other franchisees. It’ll grow, but yeah, you pay a premium. That’s part of the game when you’re investing into something existing.
George Khalife:
One more for you. I know we got to jump. In the world of alternative investments, FranShares being one, right? Not non-biasedly. I guess if you were constructing a portfolio, what are some of those alt investments that you would put in there in addition to FranShares hopefully when it launches soon?
Kenny:
I mean, all of them. I mean, this is coming from the Merrill Lynch days when I was there. But we would tell people you should have at least 20% of your portfolio in alternatives. These days, they might say 30%, 40%, or 50%. And that also goes to what you’re saying about people not being used to the long hold period. It’s like they have a savings account. You should be putting money in there that you do not need to see for a while because this is what alternative investments are for. And why they’re alternative is that they have longer hold periods to have higher returns. So like wine, real estate, they have collectable cards and comics and stuff. I always say make sure you do your own independent due diligence too. Understand what typical valuations are.
Let’s see. Here.co is a great one that does Airbnb rental ownership. And yeah. So honestly I like check out platforms like alts.co and a few others that you can actually see what all these other ones out there are and just go shop around. Find out everything that’s out there and grab a little piece of all of them. When people ask who do we compete with, I’m like, “I mean, there’s no one else doing this for franchising. I’m not competing with the real estate and the wine and comic book investors of the world.” We should all be in that same alternative bucket together.
George Khalife:
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