061 | Passive Income Through Franchises: Kenny Rose Explains the Process and Profit Potential

Could being a passive investor in a franchise be a path to building wealth and creating financial freedom? Welcome back to the Vital Wealth Strategies podcast. I’m your host, Patrick Lonergan. Today, we’re exploring this question with Kenny Rose, founder and CEO of FranShares. Kenny has made it possible for investors to passively add franchise shares to their portfolios, creating new income streams without the headaches of running a business.
In this episode, we’ll uncover what makes a franchise investment succeed or fail, how to vet opportunities for strong returns, and what accredited investors need to know before making a decision on investing. If you’re looking for smarter ways to diversify your investments and optimize your income, this episode is packed with insights you won’t want to miss.
Let’s dive in. Kenny, thank you for joining us here today. I’m excited about this conversation. Um, so we’re going to dig in with you, your founder and CEO of FranShares, the first franchise investing platform, which I think is, uh, really cool. Cause I think franchises are a tremendous way to, uh, invest in a business.
If you look at the, the data around business success, the we’ll call it the mom and pop that decides to go hang a shingle and start their own thing. And Uh, the failure rate rates really high, uh, you know, these are, these are old statistics. I, you know, nine out of 10 frail in the first five years. And then those that survived that.
Fail nine out of 10 fail in the next, uh, five years. And so, um, where it seems like with franchises, it’s almost the inverse, you know, there’s a system, there’s a process that people can plug into. And, uh, uh, I think the amazing thing is you’re giving people access to, to invest in those and treat truly, truly passive income.
So thank you, Kenny, for joining us here today.
Yeah, thanks for having me, Patrick. And that was a really great intro. Actually. I think I should have let you do this for me. Um, no, I, uh, honestly, it’s funny. Cause I feel like a lot of people are like, everyone’s heard of franchising. Everyone’s heard of investing in businesses and real estate.
And it was just like a, uh, why, why was that around before? And so I kind of love them. People kind of get it right away. Let alone when someone can explain it better than you can. All right. Thank you.
Well, I, I think the reason this, this conversation resonates, uh, for For us in our audiences, when we, we think about the, the entrepreneur, the listener here, the, their, their first goal is minimize tax, right?
Like let’s send the least amount of money to the IRS as possible. Uh, and then from there, it’s like, let’s master wealth. Let’s let’s develop our. You know, our business, our investment portfolio, and, and, you know, that can include real estate, it can include traditional stock and bond allocations. Uh, uh, and it can also include businesses.
And so I think this, this conversation is going to hit on that. And then at the end of the day, you know, we want to optimize every area of life. Right. And, uh, it’s really easy for me to optimize for my relationships and my health and those types of things. When I have passive income coming in and I’m not tied to, you know, You know, my job or my, my business anymore.
And I think you, uh, Fran shares helps with that as well. So I’m, I’m looking forward to, uh, uh, digging into, to all these pieces. So if it’s okay, can you give us an overview of, uh, Fran shares, how it works? What, uh, uh, what the platform does for, for people that invest.
Yeah, sure thing. So a franchise is the first platform that lets anyone passively invest into franchise ownership as part of their portfolio.
So, you know, you can own shares of stocks, shares of real estate. Now you can own shares of franchises. And, um, really it, uh, got started kind of off a, uh, a basic need. You know, I came from the franchise brokerage space. I was working with people who were interested in owning their own franchise, but they might not have known which one.
And I. Recommend brands based on their budget skillset and goals, and then coaching through the whole research and purchase process. And over about 10 years and working with 600 brands, I kind of realized the same problem over and over again, which is most people who have a lot of money, uh, they like to stay in the job that made them a lot of money.
And they don’t really want to run a franchise. They want someone else to run it for them. Um, the problem is when you hire a manager to run it like their own, it’s not actually their own. And so it’s hard to really make money off that. And so it’s a quick way to light a bunch of cash on fire. Yeah. But on the other side, you’ve got a ton of people who have a lot of experience, a lot of grit.
Drive, uh, and they lack access to capital, whether that’s because, uh, you know, they’ve already taken out, uh, loans to get started their initial locations, or they’re trying to get those initial locations. And, you know, if you spent 10 years working in a franchise, you’d be a great franchisee, but you don’t have a million bucks laying around and a bank is not going to lend it to you.
And so that’s where we come in is that franchise sits at the middle, connecting investors and operators. Yeah,
I love it. So you’ve got a lot of experience, like you touched on. You’ve worked with over 600 franchise brands in more than 100 industries. So I’m just thinking about the process of investing in a franchise.
How do you, how do you help me as the investor? Sort through all of these opportunities. How do I know what a good investment is versus a bad, bad investment? And, you know, even though we talked about the success of franchises, are there bad and franchise investments out there? So can you tell us a little bit about all of that?
I’ll
start with the, I’ll start with the latter. There’s a lot of bad franchise investments out there. Um, You know, I’d say, uh, there’s over 4, 000 different franchise brands. It doesn’t mean there’s 4, 000 good ones. That’s like saying every stock is good. It’s just not true. And, um, you know, there’s, uh, 300 new brands that start every year and about 300 that shut down every year and only about.
10 to 15 percent of, uh, those 4, 000 brands have even a hundred or more locations. And so you really do have to vet through what’s going to be a successful investment and again, where my background came in, but, you know, I always say it boils down to three things and, you know, before we ever let it get onto the platform, we very heavily vet and we get hundreds of thousands of franchisees that.
Reach out to us. We’re hoping to raise capital. And, you know, you have to look through all three of these lenses to make sure it’s going to be successful. Uh, first, what the brand is, you know, who is that parent company? Either the McDonald’s corporate of the world. Um, again, it’s, it’s more than just fast food, but you catch my drift.
Um, but a great thing about the franchise industry, most people don’t know, is that it’s actually regulated by the Federal Trade Commission. And as part of that, every brand has to put out, uh, full disclosures on themselves. It’s called a Franchise Disclosure Document. And it includes everything from who the leadership team is, uh, financials of the company, is there litigation against the company, how much it costs to start a location, even broken down by line item, uh, you can even see how much locations make.
So, Before you even get past who and where it is, you can look at that, what, and get a ton of information about whether the brand is worth, worth investing in. And, uh, so we look at a lot of those different factors from profitability to management and to the success rate. From there, we’re looking at the operator, you know, you could have a.
McDonald’s, the biggest known brand in the world, but if you hire someone who’s in, uh, I guess just it’s never been out from behind a computer, they’re probably not going to run it very well. And so you’re looking at, uh, what has this person done in the past? What is their experience? What have their results been?
And also things like, do they have that drive? It’s somewhere like, you know, any offering that we put on there, uh, you’re actually going to hear from the operator because you can hear it in their voice. You can hear it in their story. Um, you know, we’ve got one coming up where, you know, I hear stories where it’s like, I didn’t have running water till I was 10 years old.
And by the end of their story, you’re ready to run through a brick wall for them. It’s like, that’s who you want to invest in. Not someone who’s like, oh yeah, I worked on bullshit for 10 years. I started this on the side. I got, I got Joe running it for me. Yeah, yeah. I think it’d be a cool investment. It’s like, okay, that guy doesn’t care.
This is something on the side for him. So you want to make sure it’s a great brand with a great person running it, but then a great opportunity. And, um, you know, typically we’re doing equity investments, although, uh, after a lot of demand, we’ll be bringing some, uh, debt instruments onto the platform soon, but, um, you know, you’re looking for, uh, the opportunities as far as like what the terms of the deal are, where it’s going to be.
So like, are you opening in a good, good or growing market? Um, you know, uh, what is the, you know, What’s the term of the deal going to be? Uh, so all three of these different legs are what you’re sitting on to make sure it’s a good investment. And, you know, we’re, uh, we’re not a registered investment advisor or broker dealer.
So we’re not saying like, Hey, these are the ones that you should invest in. We’re vetting who goes onto the platform and then letting investors make the decision on if that’s going to be a good fit for them. Um, But yeah,
no, this is great. And so not to get too technical, but do I need to be an accredited investor to, uh, put dollars into, uh, one of these, these investments?
So for our current offerings, you do, uh, both in the past and in the very near future, uh, opening up to non accredited investors. And, um, you know, we’re, we’re a venture backed company and I get asked a lot about like, why not focus on one or the other, but, um, you know, Frameshares is something very unique.
Like alternative investing has gone mainstream, uh, platforms like Fundrise that let you invest in commercial real estate, uh, Masterworks, uh, get shares of a Picasso painting. Franchising is different because it’s community driven, you know, the two reasons companies franchise is access to capital, but access to people, you want someone who is local in the community, who’s going to put that those two pair of boots on the ground and go tell people to come into the location.
And so, you know, you want the bigger checks from accredited investors to contribute to that size and scale of franchising, you know, more locations, better returns. Thank you. But then you want the smaller check riders because that’s the Reddit versus wall street crowd. Um, you know, we always promote local investors first because I’m in Chicago.
Someone who’s based in Chicago that invests 500 bucks, even into a Burger King, which we’re in the backyard of McDonald’s. So I won’t say it too loud, but like, even if you invest a Burger King, you’re going to go promote Burger King. Now, you may not even have gone to either one, but you’re going to start going to Burger King to be on a piece of it and tell all your friends too.
And so, um, you know, there’s different, uh, Investment structures, depending on what type of share class you come in on. But, um, I find it’s very important to have both of them on there, but currently, uh, our live offerings are just for accredited investors and. It’s always going to be a case by case basis because, um, you know, it also depends on what, how the operator wants to raise as well.
Yeah.
And just to, just to clarify, sorry for throwing out accredited investor without defining it, but accredited investor has a net worth excluding the value of the personal residence North of a million dollars. Or an income of 200, 000, uh, a year for the last couple of years or 300 combined if, uh, if they’re married.
So, um, so it’s, I think pretty much everybody listening to the podcast is going to hit some of those thresholds. If not, they’ll be there shortly, but I appreciate, uh, that because I, you know, the, you know, It’s good to have the accredited investor status from my point of view, just, uh, you know, it protects the investor, right?
Like people can get really excited about things. They go leverage everything they own to buy into this thing. And if it doesn’t work out, you know, all those eggs in that one basket is, uh, is a problem. And accredited investor status almost forces diversification. So, um, good, very good. So I want to just highlight again, a few things that I think are really interesting about Fran shares and how this.
This works out for folks. So, you know, I just think about how hard businesses, like it is really hard to, to run a successful, profitable business. And, and I look at the things that you’re doing to combine, you know, the, the person that has the grit, the willingness to, to endure that, uh, with the people that want the returns, you know, that there may be not able to get out there and.
You know, traditional, uh, we’ll call it stock and bond investments or safe money. You know, CDs are paying better than they ever have, but there’s probably still at the four, four and a half percent, five range, you know, which it’s really hard to get excited about, about that. And then, you know, I also think about what, what people also are desiring is this, this financial freedom piece, a, you know, this passive income.
Uh, and it’s, it’s really going to take me a long time to get to passive income off of my CDs. You know, I, I need better, uh, returns and, and generally the business environment can give us those, those outpaced, outpaced returns. So, um, yeah, can you talk us through a little bit of, you know, and, and I’m going to, uh, I’m going to, I’m going Preface the fact that we’re not giving investment advice and these guarantees, these returns are not guaranteed, but can you give us a, an expectation on what, uh, we can look at and is it, I’m sure it’s a case by case basis, but is there a range that you’re typically looking at?
Like this needs to pay, you know, in this, this ballpark from a, uh, an ROI perspective back to the investor.
You know, I appreciate coming from the same world because you threw out like, Oh, I got to find a credit investor. I got to throw out, uh, all these disclosures. Cause I never dealt with lawyers before this business.
And now I live in legal. And, um, yeah, so there’s a, can’t make an earnings claim. There’s no silver bullet. It is case by case, but, you know, uh, depending on the offering, like, you know, if it’s a longstanding existing operator all the way to, if it’s a brand new operator with a lot of, with a large, uh, track record, it’s going to vary a lot.
Um, we try and aim between like the 15 to 20 percent area. Honestly, a lot of the ones go over that and they’re a combination that’s IRR. So overall rate return, but it’s a combination between that, uh, the distributions or that passive income side, as well as the growth and equity. So, you know, the. Uh, value of the business growing over time as well as an eventual exit.
And, um, you know, I find that people are really looking for both and this is the, it’s a unique asset class that does offer both like real estate tends to be the other one, but you know, you’ve got. Blackrock going down to single family homes and now they’re going into building the home. So the returns, I just don’t believe are there anymore and definitely won’t continue to be there.
And, um, but. You know, what’s important when it comes to that passive income side of things, it’s really like understanding why I think it’s easy to say like, yeah, I want passive income because it sounds like pocket change coming in. And, uh, but really what you got to think about is like the lifestyle component.
Uh, cause you know, when I was getting franchise started, uh, Another startup founder told me, go talk to 50 prospective customers and you’ll get a, uh, masters in what you’re doing. And I said, great, I want to doctorate. So I had 615 minute conversations over three months. And, um, I learned a lot. And what I learned about is that, yeah, most of them do want passive income, but I learned a lot about why.
You know, a lot of people are getting into retirement age. And social security does not pay enough to maintain your lifestyle. And so like, yeah, you could have a great nest egg, but if you keep cashing it out to maintain your lifestyle, it’s not going to go as far as you wanted it to. So you want to start like start and building these different income streams.
And I say streams plural, because like you should have multiple ones. Um, you know, a lot of people ask like, Oh, how much do I, what percent do I invest in franchise? This I’m like, it’s diversified. Like, I’d be greedy. They say we should get your whole alternative slice of the pie. Like you should have different income streams through different types of asset classes.
So the 5 percent might not be attractive and sexy, but it is diversified. You’d like that as a fallback. Um, but then the other side is that inflation is catching up more and more. And, uh, bosses don’t tend to raise your income at that same rate. And so you do need to add, uh, other sources of income to stack up to that.
And the change of cost of living there. So, um, that was kind of a long winded answer to your question. Yeah, no,
I, I, I love this. So this is great. And I personally, I feel like those returns, uh, make a lot of sense because if I’m, uh, putting dollars into, and we, we like alternative investments, you know, I’m going to highlight a few things about alternative investments and then you can, you know, Uh, help me understand how fran shares aligns with some of these or don’t, but like, uh, we have some investments that are illiquid, you know, I put the money in and I can’t, I don’t, I don’t have a marketplace to go, you know, turn those dollars at today’s value into dollars, right?
That the value entity, uh, to dollars. So, uh, that’s, that’s generally an aspect there’s. Uh, also, you know, um, you know, the cashflow, I don’t have a ton of control over how much money I’m going to get, you know, it’s going to be based on the performance. And, uh, um, but that’s, that’s not that different than, um, you know, most.
And then we’ve already touched on the accredited investor piece. So can you talk us through like liquidity of, of franchise investment? Like I put the money in, uh, and let’s say life happens in six months from now. Uh, I’m looking at my options for liquidity. And I go, can he, you know, can you send me the dollars back?
Can you walk us through that?
Yeah. So, um, you know, when you think about like where the investment actually goes, like in a public market, there’s a large cash reserve, a large network of different buyers out there in the franchise space, like you’re investing into the operation of a business. And so while we do have a secondary market, you know, that really needs to continue to develop, to have, uh, you know, A lot of people aren’t sitting there waiting for secondary.
And so like, you can’t ever guarantee liquidity, especially all term investing. You can’t. So I always tell people invest less than you want to prepare for the long haul. Like we always have the expected hold periods. And so it’s not very liquid. Uh, and honestly, I’d say the same thing with angel investing, you know, like Again, we bring investors into our company itself and, um, you know, it’s like, Hey, yeah, we haven’t gone public yet.
So it’s not exactly there. So it’s similar thing in the franchise space. So, uh, I’d say don’t plan for liquidity, but it is something that we are bringing to the forefront there. And you also mentioned the, uh, the cashflow side of things too. So, uh, that’s also why we have different types of offerings. And so there are some that are going to be pure equity play where it’s, you know, you rise with the highest tides and you sink with the low ones.
And so, um, yeah, that’s why we again, try and reduce that risk by for one being in the franchise market to begin with, but then also having the right brand operator and opportunity. So, you know, I like to say it’s not like crypto where you’re not going to have like those super high highs, but. You are going to have a lot of consistency there, but we are also, um, opening up some like, uh, debt offerings and royalty based offerings so that you can have the consistency.
Now it won’t be as high on the return profile, but it will be very consistent. Yeah. Yeah,
no, I, I love that. And, and it’s been interesting, you know, we were involved in about 150 million worth of real estate projects. Uh, we also have businesses around those real estate projects and also have businesses outside in general.
And so. You know, the interesting thing is, you know, we’ve been in a situation where we’ve been looking to raise money and we’ll create a couple of different opportunities. It’s like you can have all equity. And you’ll just get your cashflow based on that equity, or we’ll provide you a smaller amount of equity and we’ll, uh, give you some debt, you know, and we’ll just, you know, make sure you have an assured return, you know, guaranteed return, you know, based on our ability to pay you back.
Right. And then, then you get some part of the deal as well. So, um, and it’s just interesting to see how different we’ve had the same person pick different options, just because they’re like, Hey, at this point in life, this, this seems to make more sense to me than, uh, Um, you know, when I was at a different stage, so I, I love the diversification that you’re offering, uh, people in, in regards to, uh, investing and, uh, being able to do that in different ways.
So that’s, that’s fantastic. So you talked about expected hold periods. Can you talk a little bit about that? Like. If I put my dollars in, is there a period of time where I may, there may be a liquidity event where I can get some of those dollars back? So yeah, I’d like to hear more about that.
Yep. So, um, we always put the expected hold period, uh, up on the offering.
So, I mean, right now it ranges anywhere from three to four years, all the way up to 10 years. And so they’re very different types of projects. You know, it depends on the amount of locations you’re trying to do, where they, what stage they’re at. And so, uh, It’s always an important thing to look at is like how long you are planning on comfortable holding that fork.
And so it can vary pretty widely there. And again, that’s something where, as we, you know, as a company, as we continue to evolve, we hope to, again, like develop the secondary market more and even have a, uh, kind of evergreen franchise portfolio there. Yeah, I love it.
So you also highlighted a few things and, and I’m going to make my own distinctions and you can correct me if I’m, I’m wrong here.
So, uh, oftentimes I look at. I’ll call it private equity and private equity seems to be investing in like cash flows, right? Like, okay. Revenues at this model are at this level and we’re You know, generating a cashflow. And we think if we inject some capital and some expertise in, we can take that to, to another level.
Right. And then we’ve got venture capital, which is, you know, like we’re looking for a home run. We’re, we’re investing in a startup. Could be a software could lose tons of money. Like there is no cashflow. It’s like negative. Um, But someday there may be a sale, right? Like this could be an app. It could be a social media platform, something along those lines.
And so is Francia Francia’s offering sort of both of those opportunities. I thought maybe I heard that, but I wanted to just clarify.
You know, who the number one owner of franchises are in the country, private equity groups. They invest in franchisees, franchisors, specifically because the predictability of cash flow.
So it’s very much like private equity, but democratized so anyone can get into it. And also, so, also you can get into opportunities that they can’t get into. There’s a lot of brands that have rules against private equity coming in because they tend to demand control and demand, uh, the equity and really like we’re there to fund owners and, um, you know, really help them to expand when it comes to venture capital.
Like we have venture capital investors because, uh, you know, in ventures, it’s, Honestly, I guess, you know, they’re, they’re not sure if what you’re talking about is going to be, like I said, a home run or complete dud and so, uh, you know, we’re not, this would be like venture if we were looking at, like, the whole spectrum of franchising because again, there are a ton of, like, will they or won’t they, but we’re not letting any of those, like, We’re being very, uh, tight on who we let onto the platform because, uh, frankly, I think there’s a point in the future where we can open up like, kind of like the venture capital type arm of franchising, but, uh, you don’t do that until people are very well educated and really understand the market.
And, you know, eventually we’ll open that up and, you know, God disclosed all the risks and let people know, like, Hey, this is the, the very high risk, very high reward type investing. And, uh, but you can’t open it up that way. Like that’s just, you can’t. Open up rest of the
people that aren’t ready for it.
Yeah, no, that’s, uh, that’s fantastic. Thank you. So I guess one thing that I’m thinking about and this is just the nature of business and this can be a, uh, you know, we, we’ve seen darlings in the. Fortune 500, you know, uh, eventually have a fall from grace. You know, I think about, you know, I graduated college and Jack Welsh was like, uh, could have run for president and, you know, everybody loved Jack.
Right. And then, uh, G was on this, this run and it was incredible. And now we look at GE and it is not incredible. You know, the, the company is not doing very well. So what happens if I invest in a franchise it’s going well and then it doesn’t, you know, and Uh, I, I assume it’s like any other risk. It’s like, I, you know, I invested in, uh, you know, GM when it went bankrupt through, you know, the 2008 recession, I just end up, uh, you know, I got to enjoy the ride, you know, whatever dividends payout I got.
Uh, can you talk us a little bit about what happens in those scenarios?
I mean, it is investing in a business. And so like, it does come with those same risks there, but again, we try and reduce that by diversifying. So like, we like portfolios of franchises, one that are diversified by, uh, different locations, as well as different brands in there.
Um, so it’s important to, again, Not just invest in those types of portfolios, but also diversify within the different portfolios that you are investing in. Um, but you’re, uh, uh, you’re also looking at, um, you know, kind of a time horizon, you know, uh, like you said, G had a hell, a heck of a run over a long time, and we’re not asking you to indefinitely hold an investment in a franchise.
That’s why there are time horizons, because frankly, there’s a time to come in. There’s a time to get out. And for those operators, like they are betting on the longterm, especially a there. Uh, losing returns by paying out to investors while they build it up. But with the light at the end of the tunnel being that they get that long term, uh, you know, upward trajectory there.
So, um, you know, it’s, uh, kind of reducing the risk by like going in already proven brands and then also like sticking with like this silo within the timeframe there. But that being said, like. You know, those well established brands, like they’ve been around for a long time and not just like the McDonald’s and Taco Bell is the world, but like the Makos and the minor keys and, uh, the planet fitnesses and the orange theory.
So like, uh, you know, household names are, they, they have a lot of staying power. Okay.
This is, this is great. So, uh, couple follow up questions that, that got my attention. Let’s say I’ve got a half million dollars, okay? And, and you can, you can correct that number. Make it a million dollars. I don’t, I don’t care.
Um, I come to you and I’m, I’m interested in investing. One thing that you, you brought up that I thought was unique, um, cause I was assuming I would come own a small piece of one franchise. But it sounds like I can own a number of franchises, different businesses in a sector, like, can I mix and match my investment?
Uh, I, yeah, I’d love to hear more about this.
I think you should. Honestly, we have multiple offerings, and I’d say you should invest in a little bit in all of them, not all into one of them. And even within those offerings, they, uh, tend to be. Uh, things of multiple locations at the same time to like, I know, uh, we, we max have a client and, uh, one of the Hawaiian bros locations, and that’s one of 10 that are in development.
And when you’re investing in it, you get ownership in all of those, uh, we’re launching one for a brand called ever bowl. They’ve got a couple hundred and development across the country. And, uh, this is for the development of a couple dozen in Texas. And, uh, so like, I think it’s important to spread it across multiple offerings.
And, uh, you know, we’re launching with even more industries in the coming months. So I think it’s important to just, you know, continuously do a little bit into different offerings.
Yeah. Yeah, no, that’s, that’s fantastic. And, and, you know, if we think about, like, I think of my role, you know, if I put on my financial advisor hat and I’m like, okay, um, Mr.
Entrepreneur, if we want to get you to a desired outcome, the best way to do that is diversification, like you talked about, right? Um, and if that desired outcome is we’ll call it passive income that exceeds our expenses and we want to just be retired, right? Uh, Sitting on the beach, no shoot, no, no, no shoes, no shirt, no, no problems.
Right. Um, but if I want to grow maximum wealth, that’s actually a different discussion. Right. Because maximum wealth is a concentrated position leveraged. Right. Uh, and, uh, so I, I think we need to be like, just crystal clear. It’s like, we’re not trying to be Bill Gates. We’re not trying to be Elon Musk, you know, just.
Crossed over the 400 billion threshold, which is a, you know, when you start figuring out how many dollars are in a billion, it’s a, it’s a lot, you know? Um, So I think that’s an important distinction. Like we are not trying to, uh, go to the moon from a valuation perspective. We are trying to get you to this, you know, maybe what we’ll call financial freedom point where, you know, we’ve got passive income, we’ve got appreciating assets, we’ve diversified the risk and, uh, uh, we got there maybe faster doing it through franchise versus, you know, going investing in the S and P 500, you know, um, so yeah, is that, is that a fair.
It is. And there’s very variation variance within that. Cause I like to say we’re the consistent medium, you know, it’s not your low 5%, nor is it you’re like, High growth tech stock that you’re kind of guessing on will, they won’t, they, it’s not the crypto, which that could be for better, for worse. It’s, you know, medium risk, medium reward.
But even within that, there are different ways that you can invest in franchising. So like if you’re investing into existing locations, you’re reducing the risk, but you are also reducing the returns because like someone else. Built it up. You’re buying into something that’s more valuable. It’s going to reduce your returns.
But if you’re investing into something earlier, whether that is an earlier brand or into, uh, new locations, you’re getting an earlier, you have more of an equity growth trajectory while the other might have more of like an income trajectory. So it’s the same thing that you can find within real estate and stocks just within the franchise space.
Yeah, I love it. All right, Kenny. So one, one question I have that you, you brought up is, you know, they’re the, the owners, you know, They appreciate the investment because it helps them, you know, get their, their franchise off the ground and get going. But at some point they’re putting in the blood, sweat and tears.
And, you know, as entrepreneurs, we understand we want to be, uh, rewarded for those, those that work. How do they go about buying out the, um, The investors, is there, is there a valuation at a certain point in time and their agreement says, yep, okay, this has been fun cashflow and really well, here’s your dollars.
Are they generally going to take on their own personal debt to get those investors out? How, how is that happening?
Yeah, so there’s a couple different ways they can go about doing that, you know, one, to back it up, uh, step two is that like, there’s different ways that they make money within there as well, like, um, you know, as one of them said to me, we’d rather own a slice of watermelon than a whole grape, and so it’s like, hey, they’re happy to take on the investors because like, yeah, they’re getting a smaller portion of it, but it’s a much larger amount they could have before.
And other times they charge like their own management fee on top. It’s like, Hey, we get a very small equity percentage, but we’re charging like our own engine fee on top because we’re doing all of this work. Um, as far as exit strategies, there’s a few different ones. Uh, one would be that, yeah, do a recapitalization and to get out, get a loan and buy out the existing investors.
Um, typically there’s like A standard market multiple, depending on the industry and the brand size. Um, you know, it’s, again, there’s a lot less guesswork when it’s the franchise world, because it’s very consistent. And, um, you know, honestly, that’s also a goal of franchise is that we want to be able to offer, uh, you know.
That type of lending for them, uh, to buy out the investors. Um, another side too, is that, um, they can actually, uh, get acquired themselves. So again, private equity are the largest owners in the space and they love to just go roll up other locations. And that’s honestly what a lot of companies that we race for are just planning on.
It’s like, we’re never going to buy out the investors. This is going to get acquired and everyone’s going to get their payout. And that’s, I’d say probably the most common just because it happens so much in franchising. And then, um, yeah, it’d be, uh, the other way is that, um, you know, I’d say sometimes they’re like, can they do well enough?
They want to just buy out investors. It might not be lending. It might be, they have the cash to start doing so. They do a little chunk at a time. So, uh, but multiple different ways you can exit a franchise. Got it. Great.
Um, I appreciate your willingness to answer all my questions because I, I, I’m trying to think, uh, as an investor and I, I could see myself being interested in this personally.
So, uh, I, I think another question I have is, is there, can I make a private market, you know, if, if my, I want to get out and my brother in law wants to buy my position, is that. Is that acceptable or Oh, that’s fine. Okay.
Uh, depending on the type of raise, sometimes there’s a year hold. Um, but yeah, that’s totally, uh, if it’s for accredited investors, it has to be another accredited investor, but yeah, that’s totally fine.
Got it.
Great. So you brought up something that, uh, is. A lot of our clients are going through, they’ll have, they’ll exit their own company. Okay. And sometimes we had discussions around. You know, an earn out or something along those lines. And one of the reasons we don’t like an earn out is because it, it, the, the new buyer can manipulate the financials to, you know, show, look, there, there wasn’t enough profit to like pay you out.
And so you, you brought up something about the management fee and, and I want to wonder about that for a second. Like. Is there room for abuse there? Like, can I just dial the management fee up to point where it soaks up all the profit and now there’s nothing to pay out to the investor?
That’s, that’s part of the, uh, operating agreements is that as something that is locked in and you can’t, and you can’t change.
So, uh, it’s a great question, but that’s also why, uh, I’m so fond of lawyers now is to make sure those aren’t problems I have to worry about. I love
it. Thank you for clarifying that. Uh, and then. We’ve also looked at, uh, some investments that have had like preferred returns attached. Is there anything like that in these scenarios or is that, uh, Typically our investors are the ones that get the preferred returns.
Yep. Got it. Um, and are those like, is there a stated figure there? Like, Hey, we’re going to do an 8 percent preferred return and then split profits after that. Or is it, uh, all of the revenue, just, you know, the net income split.
It varies by offering, but typically it’s like a set preferred return amount and then a split of everything based on the ownership afterwards.
But again, that’s why like each offering is a little different because you might say like, we also want investors to have that different type of, uh, You know, uh, investment availability with them is like, maybe I want to hire preferred return, but I’m going to get less on the backend, or maybe they say I’m okay with less preferred return because I want all that upside.
So, um, and that’s again, why I always say you diversify across different offerings that we have, because. You want a little bit of everything because you want to hit some of that upside, but you also want some of a safety gap too. Yeah. Wonderful.
All right. So my next question is, you know, we’re always looking for a tax angle.
Okay. And there may not be one, but oftentimes when we. Uh, make investments, there’s, there’s hard assets, right? There’s things that can be depreciated and, and whatnot is, does any of that depreciation, uh, flow through to the investor that they could utilize, or is that all stay at the, on the owner side?
Yeah, well, not the owner side, but does typically on the business side. And so like, uh, In essence, like downflow, like investors do get some of that, but what I will say is that’s another reason why we want a lot more non food offerings is that qualified small business stock is a great tax advantage, but it is not available for, uh, I think it’s, if you have, uh, you actually correct me if it’s 50 percent or more food, um, or somewhere around there.
So, um, there are different offerings. We’ll have different types of tax advantages for sure. Got it.
Yeah. And. I just want to make sure that, uh, so the qualified small business stock is capital gains tax free right on the back end when we sell. And so, um, and I, I, I know just enough of the rules to be dangerous on that.
So, uh, we, we love the same, the QSB. So
together, this is not tax advice. That’s
right. Absolutely. Uh, go talk to your tax professionals. But, uh, the cool thing about the QSBS is there’s a 10 million. Uh, it has to be original issue, C Corp stock, and you get a 10 million capital gain tax free exemption. No, it’s a, it’s tremendous opportunity that, uh, uh, is out there.
And so, yes, uh, I don’t know all the nuance around it. That’s, I think I gave you most of what I understand about, um, that’s about as far as I was going to get to. So, Yeah, but it’s a, it’s a tremendous tax tool. So, um, that’s, that’s really good to hear. So can you talk a little bit about industries? Like what, what industries are, um, are you seeing on a favorite subject?
Yeah, great. Um, yeah, I mean, yeah. So franchising is obviously typically known for food. Uh, food’s also not really my favorite industry in franchising. I call it the war for pennies. Like there’s high volume, but it’s very tight margin. And, um, in my like. Around decade in the franchise brokerage space. I very rarely, uh, got people into the food franchise space, um, home services, hair care, automotive fitness actually got, um, one of the largest hotel, uh, franchises is coming on board soon.
Um, yeah, so, uh, Honestly, I tend to like service based businesses because the profit margins are a lot larger and also a lot of times they have lower startup costs to, um, you know, if you don’t need a retail space, you just cut out a heck of a lot of, uh, um, of the built of the cost there. And, you know, even things like senior care, it’s.
It’s like you barely need an office for that. It’s a really, it’s all about, it’s all people and process driven, which is what the franchise model brings you is that, you know, you show up on Google, you know how to convert and you know how to service. Yeah, I love it. Yeah,
no, I, I would agree with you. I just look at the, the restaurant industry and the margins are awfully tight and the competition’s really high and, uh, you know, the consumer is awfully fickle and so, um, yeah, and we’ve got some clients that are in the process.
Uh, like you mentioned, senior, uh, the in home healthcare for, for seniors, uh, in home healthcare in general, you know, I think disabled people as well. And so it’s, uh, it’s just interesting to see that, that model work, you know, it’s like, you don’t need a real estate location. You just need the people. They franchise,
they franchise everything.
And, uh, honestly, I want to offer it all on Franchairs one day. I mean, the, uh, the guy who got me into franchising, he was the CEO of a company that CEOs, which is the franchise. Executive coaching is a franchise. Uh, I mean, I’ve seen it in, uh, painting, uh, even like doing the lines on a parking lot. Uh, heck there’s, uh, the, the sex shops are franchised too.
They, they franchise. Well, it’s, it’s wild how many, and there was one the other day, uh, right now it’s just came up. It was, uh, Oh, hard top storage for, uh, cars, you know, like, uh, hard top and soft top store storage. I’m like, what a bizarre business, but apparently they crush it. And I’m like, that’s a franchise.
And so even to this day, you hear about new industries and brands out there. So, uh, yeah, it’s, uh, it’s such a wide industry. And, uh, again, just like the stock market, you’re invested in all sorts of different industries. And. We’re just our own franchise stock market. I love it. I
love it. All right. So Kenny, this has been, uh, awesome.
I’m, I’m going to give you what I see is sort of the, the summary of, if I want to go invest in franchise, here’s, here’s what the way I see it. I need to decide on an asset allocation, right? Um, You know, a hundred percent is probably a little too much. Uh, but you know, when I look at my portfolio and I go, okay, what, what dollars do I want invested in the alternative sleeve, we’ll call it.
Um, and we, we sort of carved that out and then we go, okay, I’m going to, I’m going to take a piece of this and I’m going to call, uh, Kenny up and we’re going to start to review opportunities. Right. And we’re going to get a full understanding of, you know, the, uh, opportunities that are out there in the sectors that we’re interested in.
And then from there, I make a decision and I invest my dollars. Is that, uh, does that sound like a decent summary for, for how
this process works? That’s a really good summary. I would say, uh, you said carving out an alternative slice, then you got to carve that slice up because he got real estate, maybe precious metals, and then franchising is just a slice within there, you know, not greedy.
There’s pie for everyone. And, um, you know, uh, you can also just, obviously you just go directly to the website and check out the offerings at any time of day. And like, again, I say there’s never such thing as too much education. So I, when you sign up, you get a franchise investing guide and the offering that’s up there, you get to, uh, there are multiple videos where you get to meet the owners and operators, you get to tear through all the different details about the brand, the operator, the opportunity.
So it’s, uh, you know, honestly, it’s, I gotta say, it’s not for the faint of heart. Cause like you should do all your research. It’s not just like a, uh, all right, look at these numbers. All right, cool. That’s good. It’s like, you know, it’s you, you. You should properly vet, like we properly vet, but then people still need to like do research and see what makes sense for themselves.
Yeah. And so on the research side, you know, I show up, I’ve got my half a million dollars I want to put into franchise. What are, what tools do you have available for me to, to be able to do that? Or me and my team, right? Cause I, I assume you’re not. Um, going back to the investment advice, right? Like it’s your job to provide the data and then it’s, is it my job to analyze the opportunity and make a final decision?
Yep. Yeah. Uh, cause again, we can’t really give you a advice on that, but we can present all the facts and, you know, hope that it makes sense for you and you want to spread that across different opportunities. But, um, yeah. Uh, honestly, I also just. I don’t like being in the position of putting that advice in your hands.
Cause frankly, I don’t think you, I don’t think people should be sold it. It’s something that like, just didn’t make sense to him. It’s a good fit. Like, and people want to invest in small businesses. They want to create jobs. They want passive income. And you honestly, that doesn’t come for nothing. You got to do the research yourself.
Let’s some, we, we try and make it very digestible, but at the same time, like. You gotta take time to learn. I mean, you took time to learn about stocks, bonds, real estate at some point. It’s just a new asset class that you gotta take the time to learn about. Yeah.
I love it. I love it. So if I’m just thinking about next steps, like somebody’s interested, they’re listening to this going, this is, this is fantastic.
If they’re one of our clients, we can absolutely get them in touch with you. But, uh, somebody that’s, that’s not a client, what’s the best way to connect with franchisees and start the process.
Yeah, I’d say connect with the company and connect with me. Um, go to franchise. com and you can, uh, go sign up and take a look at the open opportunities there.
But I’m also a, uh, as you can tell a very, uh, open wind, open door. So, uh, I say always go find me on LinkedIn, connected to me there. Feel free to shoot me questions. I’m generally pretty responsive to it. So, uh, just say how you heard us so I can make sure I give you the credit there.
Yeah, no, I appreciate that.
And we’ll have links in the show notes. To, uh, all of Kenny’s contact information and the website for shape brand shares as well. So, uh, yeah, and I think, you know, this is something that I think, uh, makes a lot of sense and, and I could see somebody going, all right, I want to, I want to dip my toe into this franchise investing and see how it works.
You know, what would you say are their, their minimum thresholds for investing? How much, what’s the minimum that somebody could put into one of these opportunities?
Yeah. So, uh, I mean, for opportunities that are live right now, their minimums are all 10, 000. Um, uh, the range of investments is anywhere from, uh, we’ll say five to seven figures.
And then, um, You’ll also see like some of them that are coming up that are open to non accredited people. Those ones that we typically open it as low as 500 bucks. Again, that will be a bit of a different share class for like, whether you’re accredited doing those higher level investments or non accredited doing the lower level ones.
But, um, you know, like I said, even within there, you can diversify your holdings and, uh, um, yeah, like I said, don’t, You never go all in on anything, but you also dipped your toe in a little bit of everywhere.
Yeah, no, I, I love this. And so, you know, I, I look at what happens when we, we take action, right? I, we’re, we’re huge believers in, you know, we can, we can analyze opportunities to death and never do anything.
And so I look at one of these opportunities is like, okay, let’s, let’s go try this out and see how it works. You know, let’s put, 10 grand in and see what kind of returns we get. And then we can, you know, consider more of our alternative sleeve into to the, the franchise side of the equation. And so when I look at the passive income returns that you’re, you’re generating, um, it’s fantastic.
It’s, it’s hard to find those in, uh, You know, the problem with real estate is it’s time intensive, right? We’ve got all the teas, the tenants, the toilets, the trash, the turnover, you know, all the stuff, right. That, uh, nobody wants to deal with. And the average landlord last three years before they get out of the game, because they, they didn’t realize it was like owning another small business where this is.
Yeah. Yeah. It, uh, it’s really interesting. So, um, and we, we counsel our clients. Like we love real estate, but you, it’s not a passive income stream.
Same as franchise. People love the idea. It’s just like, I’d love to own a building. I’d love to own a franchise. Like, do you actually want to do it though? Yeah.
Yep. Um, so, uh, I think this is a tremendous way to get that, that truly passive income. And, uh, uh, I see it as a fantastic opportunity for people to try out. And, you know, it’s like, it could be a door to really fantastic opportunities, uh, you know, with the diversified approach to, to create some really nice income, you know, the alternative side of that is if I don’t take action, right.
I’m, I might be stuck in my. You know, uh, my current situation might not get across that, that financial freedom barrier, uh, as fast as, uh, I would have, if I would have explored some of these steps, um, I think this is, this is fantastic, Kenny. I appreciate, uh, all of your time and energy. Is there anything else we should talk about that we haven’t discussed before we wrap up?
And, you know, you’re pretty thorough. I think we, uh, I think we got everywhere. All right. Um, yeah, no, it’s a great speaking with you. I appreciate it. And I appreciate you letting me share with the audience.
Yeah, no, this is, uh, this has been wonderful. Thanks so much for joining us here today. And we’ll, uh, we’ll be talking soon.
Awesome. Looking forward to it. All right. Thank you for listening to the vital wealth strategies podcast. Our mission is to serve entrepreneurs like you to minimize your taxes, master your wealth, and optimize your life. And don’t forget our 2025 planning resources are still available for immediate download at vital strategies.
com forward slash planning. If you missed our last week’s episode, be sure to check it out. It’s a great starting point to set up your 2025 for success. Most importantly, thank you for being a vital entrepreneur. You’re vital because you’re the backbone of our economy, creating opportunities for your employees and driving growth.
You’re vital to your family for fostering abundance in every area of life. And you’re vital to me because you’re committed to mastering wealth building, making an impact and optimizing your life until next time. I’m Patrick Lonergan, and thank you for listening to the vital wealth strategies podcast.