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Investing in Franchises Using Equity Crowdfunding

June 16, 2016

Franchise Outlook

Did you know that there are more than 750,000 franchises, employing over 18 million people in the U.S., and generating $1 trillion in annual sales?

Franchising has been coined as “An American success story”. IFA president Steven Caldiera said “Independent, locally owned small-business men and women, including more veterans and minorities, who own and operate establishments...are growing faster than other businesses. They are creating more jobs at a faster pace than other businesses and they are also producing more sales growth than other businesses."

Crowdfunding Your Next Franchise

While most crowdfunding efforts lean towards tech, franchise specific equity crowdfunding is quietly growing. Crowdcube, recently facilitated campaigns that exceeded their capital goals. With a storied history in the United States and early equity success overseas, franchise investment could be a great fit.

Ideal Business Structure

Experts in the space are optimistic that equity crowdfunding will provide franchisees with a new way to raise capital. In an article on TheCrowdCafe, business lawyer Mark Mohler pointed out the structure is conducive to crowdfunding: The conventional model is

  1. Designed to reach cash flow quickly,
  2. Requires only one round of investment (the initial investment). 

Consequently, investors are less likely to face many of the potential complications of follow-on financings, such as misaligned expectations, or a dilutive event. Companies can raise up to $1 million from the crowd under Regulation CF, which is typically more than the required initial investment to become a franchisee. In a quote from Entrepreneur, Daniel Gorfine expressed, "There are certain things that make crowdfunding and franchising a natural fit.” He added that bringing in local investors boosts credibility to the investment since they’re able to visit the physical business regularly and bolster the customer base.

Community

Franchisees, that opt to raise capital through equity crowdfunding, would offer investors a percentage of the location’s profits. This allows franchisees to facilitate an immediate need, while adding additional value in providing the community an investment opportunity they believe in.

Franchises that deal with education, fast casual food, and health/wellness could be well suited for the equity funding model. Kumon ranked 40th on Entrepreneur’s 2016 Franchise 500 List and has been franchising since 1958. Jimmy John’s Sandwiches ranked 8th in the 2016 Fastest Growing Franchises and Anytime Fitness ranked 10th. In order to start the business, franchisees need to invest anywhere between $63,000-$555,000.

To simplify things, let’s create an example of how this might work in the future:

  • Families in a particular community want their children to have access to K-12 tutoring.
  • Aware of the interest, a franchisee could start a funding round to bring a Kumon into their neighborhood.
  • Instead of fronting the initial investment of $64,073 to $134,100, the franchisee now has the opportunity to let the community fuel the growth of the business from the start. 

Even though this is just an example, some franchises have already seen initial success in using this model to start their franchise.

Test Markets

The UK provides a convenient test market for franchises, since equity crowdfunding platforms have been active for the last four years. Two British franchises recently exceeded their campaign goals on CrowdCube:

  1. Wrap It Up! serves healthy fast food and is striving to be Subway of wraps. There are 11 stores across central London and has a waiting list of people that requested to become franchisees. Last year, Wrap It Up! Raised £759,660 from 568 investors.
  2. Energie Fitness, the UK’s largest fitness club franchise with 93 locations across 5 countries, has raised £567,220 from 251 investors and has 4 days left in the campaign. The goal is to expand to 583 clubs with a network of 1 million members.

Back in the US, innovative donation based crowdfunding sites designed specifically for franchises could also indicate an opportunity, now that Regulation CF has gone into effect. Fund-A-Franchise forms strategic partnerships with franchisors, allowing franchisees to accept donations from communities that have expressed interest in bringing a franchise to their neighborhood. Crowdfranchise has taken a tiered approach that allows community members to sponsor a franchisee.

Will It Work?

We can’t read the future, but we’ll stay optimistic on the marriage between the two. On the positive side, crowdfunding allows communities to have a say in what franchises they want in their communities. This could make for a better opportunity for the franchisee, and it empowers the community to start investing in the businesses they support. On the speculative side, you have to be aware of all the risks that come with any new business or investment opportunity.

Read more about that late stages of equity funding in our newest post


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