Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Are Using Fractional Ownership to Reduce Risk
Transcript
- Lucas: So Luna, you know that feeling when you find a franchise concept you really believe in, but the thought of putting down three hundred thousand dollars — or more — for a single location gives you pause? Luna: Absolutely. That's a lot of eggs in one basket. Especially if it's your first unit. Lucas: Right. Well, a growing number of franchisees are tackling that by using fractional ownership — basically, buying a piece of a location rather than the whole thing. It's like a real estate syndication, but for a franchise unit. Luna: So instead of one person owning a Subway, ten people each own ten percent of it? Something like that? Lucas: Exactly. And in some cases, it's even more creative. I came across a group in Ohio that pooled capital to open three Subway stores. Instead of each person owning one store individually, they set up a limited liability company that owns all three, and each investor holds a percentage share in that LLC. Luna: Interesting. So they get diversification across multiple locations, not just one. How did they structure it legally? Lucas: They formed what's called a franchise syndication LLC. The lead franchisee — the one who goes through the franchisor's approval process — acts as the managing member. The other investors are passive members. They all sign an operating agreement that spells out profit splits, decision rights, and exit terms. Luna: And the franchisor — Subway in this case — was okay with that? Lucas: That's the key question. Franchisors typically want a single point of contact — one person who signs the franchise agreement and meets their financial qualifications. So the managing member has to be someone who passes the franchisor's background check and has the net worth. The other investors never show up on the franchisor's radar. The deal is between the franchisor and the LLC, but the managing member is the face. Luna: So the silent partners are truly silent. I guess that's similar to how some private equity groups buy franchise rights. Lucas: Exactly. In fact, there are firms now that specialize in creating these syndication vehicles for franchisees. They handle the legal paperwork, find the investors, and ensure compliance. One company, FranFund, has been helping franchisees raise capital through fractional ownership since 2020. They report that the average deal size is around two hundred fifty thousand dollars, with five to fifteen investors per deal. Luna: What about the tax side? If the LLC owns the assets, does each investor get a K-1? Lucas: Yes, exactly. Each member gets a Schedule K-1 reporting their share of income, deductions, and credits. That can actually be a benefit — pass-through losses from startup costs and depreciation can offset other income for passive investors, which is attractive for high-income professionals looking to diversify. Luna: So a doctor or a lawyer could put fifty thousand into a franchise unit and get tax write-offs while collecting a share of the profit. Lucas: Precisely. And that's exactly who's doing it. The Ohio group I mentioned had a mix of a dentist, two engineers, and a retired teacher. None of them wanted to run a Subway, but they believed in the brand's turnaround under its new ownership structure. They each put in about forty thousand dollars. Luna: What's the minimum investment typically? Can you get in with five thousand? Lucas: Some deals are as low as ten thousand, but the legal costs of setting up the LLC and drafting the operating agreement mean that smaller raises eat into returns. Most syndicators recommend a minimum of twenty-five thousand to make the math work. And the managing member usually takes a promoted interest — like a real estate general partner — to compensate for their time and risk. Luna: So it's not for the casual five-hundred-dollar dabbler. It's more like a private placement. Lucas: Right. And it's not just for restaurants. I've seen fractional ownership pop up in service-based franchises like lawn care, cleaning, and even tutoring centers. The model works anywhere the unit economics are predictable and the brand has a proven system. Luna: What about liquidity? If I want out, can I sell my share easily? Lucas: That's the biggest downside. There's no secondary market for fractional franchise shares. The operating agreement usually includes a right of first refusal for other members, so you can sell to another accredited investor, but it might take months. Some groups are exploring putting their shares on platforms like EquityZen, but that's still rare. Luna: So it's an illiquid investment, like a private real estate deal. You have to be comfortable holding for five to ten years. Lucas: Exactly. But the upside is that you get diversification across multiple units for a fraction of the capital. If one store underperforms, the others might carry it. And because you're not the operator, you don't have to deal with the daily headaches. Luna: I can see why it's taking off. If this continues, franchisors might start to regulate it more formally. Some already require disclosure of all beneficial owners. Lucas: That's a good point. The Federal Trade Commission's franchise rule requires franchisors to disclose certain information, but it's not clear if passive investors in an LLC count. I think we'll see more franchisors updating their disclosure documents to require a list of all members. But for now, it's a relatively unregulated space. Luna: So what's the takeaway for someone listening who's been priced out of franchising or nervous about putting all their savings into one unit? Lucas: I'd say look for existing syndication groups in your area. Talk to a franchise attorney who knows the model. And start small — maybe with a twenty-five-thousand-dollar stake in a proven brand. You get the experience of being a franchise investor without the full operational responsibility. Luna: And you might end up owning a piece of three Subways instead of just one. Lucas: Right. And if today's conversation gave you a useful way to think about entering franchising, that's exactly the kind of insight we try to deliver every week. The show stays ad-free because of listeners who find value in it and choose to support it at buy me a coffee dot com slash fexingo. No pressure, but if it moved your thinking forward, that link is how you keep the conversation going. Luna: Yeah, it's a small way to say 'this matters to me' — and it keeps the episodes free for everyone. Lucas: Exactly. Okay, back to fractional ownership: one more angle I want to touch on. How does this compare to a REIT? Because some people hear 'fractional ownership' and think it's like a franchise REIT. Luna: Good question. A REIT typically owns a portfolio of real estate properties and passes through rental income. A franchise syndication owns the business itself — the equipment, the lease, the inventory, the brand license. It's more like a private equity fund than a REIT. Lucas: Right. And REITs are highly regulated, trade on public exchanges, and have specific dividend requirements. A franchise syndication is private, illiquid, and has no such requirements. But the idea of pooling capital to buy a diversified set of assets is similar. Luna: So if someone wants the liquidity and transparency of a public market, a franchise REIT would be better. But if they want direct exposure to a specific brand and unit, fractional ownership is the way. Lucas: Exactly. And there's actually a company called Franchise Realty Income that's been trying to create a publicly traded franchise REIT — but it's mostly focused on the real estate underneath the franchises, not the operating businesses. Luna: So for now, fractional ownership remains a niche but growing tool. It's democratizing access to franchising, albeit for accredited investors. Lucas: And that's the key limitation — you generally need to be an accredited investor to participate. The SEC defines that as having a net worth over one million dollars or an annual income over two hundred thousand. So it's not open to everyone yet. But as the SEC considers updates to the accredited investor definition, that could change. Luna: If it does, we might see fractional franchise ownership explode. It could become as common as crowdfunding for startups. Lucas: That's a real possibility. And some platforms like MainVest and Honeycomb Credit are already allowing non-accredited investors to buy into local businesses, including franchises, through Regulation Crowdfunding. The amounts are smaller — up to five thousand dollars per investor — but it's a start. Luna: So there's a spectrum: from a ten thousand dollar Reg CF stake to a fifty-thousand-dollar accredited syndication. It's all about choosing the right vehicle for your financial situation. Lucas: Right. And that's the beauty of the franchise model — it's adapting to modern capital markets. Fractional ownership is just one example. Next time, we might talk about how franchisees are using revenue-sharing agreements to fund growth without giving up equity. Luna: Looking forward to it. For now, if you're intrigued by fractional ownership, start by finding a franchise attorney who's done this before. The legal fees will be worth it. Lucas: Good advice. And as always, thanks for being part of the Fexingo Business community. We'll catch you next time.