Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Top Franchisees Use Revenue-Sharing Partnerships to Expand Without Debt
Transcript
- Lucas: So you're a franchisee with three profitable units, you want to open two more, but you don't want to take on more SBA debt, and you don't want to give up equity to a private equity fund. What do you do? Luna: I've seen a few franchisees turn to revenue-sharing partnerships instead. Basically, you bring in a silent partner who gives you capital in exchange for a cut of top-line revenue — no interest, no equity. Lucas: Exactly. It's not new — it's been used in real estate and oil and gas for decades. But in franchising, it's become more structured in the last few years. I talked to a franchisee in the quick-service space who used this model to open three new locations over eighteen months. Luna: What kind of deal did they strike? Lucas: They raised about one point two million dollars total across the three deals. Each location got about four hundred thousand dollars in build-out capital. In return, the partner gets twenty percent of gross revenue from those specific units for seven years — capped at two times the initial investment. So if a unit does five hundred thousand a year in revenue, the partner gets one hundred thousand annually. Over seven years, that's seven hundred thousand — but the cap means they stop at eight hundred thousand total. Luna: So the franchisee keeps all upside after that cap is hit. And the partner has incentive to help the unit perform well. Lucas: Right. And crucially, the partner has no operational control. They can't tell you what to put on the menu, who to hire, or when to remodel. That's the big advantage over private equity — you keep full operational autonomy. The partner's only leverage is that if you don't pay the revenue share, they can sue for breach of contract. But they can't fire you or force a sale. Luna: What's typical in terms of the share percentage and term? I've seen a range. Lucas: Usually fifteen to twenty-five percent of gross revenue, for a term of five to seven years. Sometimes with a cap of one point five to two point five times the original investment. The percentage depends on the risk profile — if the unit has a proven track record, you can negotiate lower. For a new concept or a higher-risk location, the partner might ask for twenty-five percent. Luna: And how do you find these partners? It's not like there's a marketplace. Lucas: There actually are a few platforms now — some franchise brokers have started matchmaking services. But most deals happen through existing networks: other franchisees, family offices, high-net-worth individuals looking for passive yield. The franchisee I spoke with found his partner through a former corporate executive he'd worked with years ago. Luna: So it's relationship-driven. What does the due diligence look like? The partner is going to want to see your unit-level financials, your franchise agreement, your personal credit. Lucas: Yes, and they'll typically want a personal guarantee from the franchisee. That's a sticking point for some. But the guarantee is usually narrower than an SBA guarantee — it's tied specifically to the revenue-sharing obligation, not the full loan amount. The partner also does their own underwriting on the brand: how strong is the system, what's the failure rate, what's the average unit volume. They want to see that the concept has been around for at least five years with consistent performance. Luna: What about conflicts? The biggest one I can think of is reinvestment. If the unit needs a remodel after five years, the franchisee might want to reinvest profits — but the partner is getting a cut of revenue, so they might resist anything that depresses top line, even if it's smart long-term. Lucas: That's a real tension. In the deal I studied, they addressed it in the contract: capital expenditures above a certain threshold — say thirty thousand dollars — are excluded from the revenue calculation for a period of time. So the partner's share is calculated on revenue before that capex comes out. And they also had a clause that allows the franchisee to buy out the partner after three years at a predetermined multiple. Luna: So an exit path is built in from the start. Smart. Lucas: It's essential. Without a buyout clause, the partner is locked in for the full term, and that can become a problem if the franchisee wants to sell the entire business or refinance. The buyout formula is usually based on a multiple of trailing twelve-month revenue share — maybe three or four times. Luna: Let's talk about how this compares to other funding sources. SBA loans are the default for most franchisees: lower cost, but you need good credit, and the personal guarantee can be crushing if things go wrong. Lucas: Right. The SBA 7 loan program is great for established operators. Interest rates right now are around prime plus two to three, so maybe nine to ten percent. But you're on the hook personally. With revenue sharing, there's no interest — the cost of capital is the revenue share. If the unit performs well, you might end up paying an effective interest rate that's higher than an SBA loan. But if the unit underperforms, the partner shares the downside because they get less revenue. There's no fixed debt service. Luna: So it's more flexible in bad times, more expensive in good times. For a franchisee who's confident in their ability to execute, the SBA loan might be cheaper. But for someone who wants to limit personal liability or can't get a traditional loan, revenue sharing is a viable alternative. Lucas: Exactly. And then there's private equity. PE firms will give you more capital, but they want control — board seats, approval over major decisions, and usually an exit timeline of three to five years. Revenue-sharing partners are purely passive. For franchisees who value autonomy, that's a huge difference. Luna: What about the franchisor? Do they allow revenue-sharing partnerships? I know some franchise agreements restrict who can be a passive investor. Lucas: That's a critical point. Most franchise agreements require the franchisee to disclose any ownership interest or financing arrangement. Some franchisors prohibit certain types of passive investors, especially if the investor is a competitor or has a conflict of interest. But in general, revenue-sharing partners don't have ownership — they have a contractual right to a percentage of revenue. So it's often treated as a financing arrangement, not a transfer of ownership. Still, you should always get the franchisor's approval in writing. Luna: Let's talk about who this works best for. The franchisee I've seen use it successfully were already multi-unit operators with at least two years of profitable unit-level data. They had strong systems in place — good managers, efficient supply chain. Lucas: That's exactly right. Revenue sharing is not for first-time franchisees. It's for proven operators who want to accelerate growth without taking on more debt or giving up control. The partner is essentially betting on the franchisee's track record. If you don't have a track record, you won't get good terms — or any terms. Luna: And it's not just for brick and mortar. I've seen it used in service-based franchises too — home cleaning, lawn care, even tutoring centers. The structure is the same: capital for a percentage of revenue for a fixed term. Lucas: Good point. The model is industry-agnostic as long as the unit economics are clear. You need to know your average unit volume, your gross margin, your break-even point. The partner will do their own analysis, but if you can show them a clear path to a two-times return in five to seven years, you have a deal. Luna: One last thing — what's the negotiation like? What are the key levers? Lucas: The percentage is the obvious one. But also the cap, the term, the personal guarantee, the buyout multiple, and what counts as revenue. Some partners want to define revenue as gross sales including discounts and refunds. The franchisee should push for revenue net of returns and credit card fees. Also, the frequency of payments — monthly is standard, but quarterly is better for the franchisee's cash flow. Luna: And legal costs? Who pays? Usually both sides have their own counsel — figure ten to fifteen thousand in legal fees total for a deal of this size. Lucas: That's a good ballpark. Worth it if it protects both sides. And the agreement should include audit rights for the partner — they get to verify revenue numbers, usually once a year at their expense unless they find a discrepancy. Luna: If you're a franchisee listening, and you're thinking about this, what's the first step? Lucas: Pull your unit-level financials for the last three years. Calculate your average unit volume, your revenue growth, your cash flow. Then ask yourself: if I had to give up twenty percent of top-line revenue for five years, would the new units still be profitable? Run the numbers. If it works, start talking to your network — other franchisees, your franchisor's development team, maybe a family office you have a connection to. Luna: And be transparent with the franchisor early. Some franchisors have a list of approved capital providers. Ask before you negotiate. Lucas: Yeah, that's a smart move. You don't want to spend three months negotiating a deal only to find out the franchisor won't approve the partner. Luna: So what about franchisees who are already using this model — are they happy? Lucas: The quick-service franchisee I talked to said he'd do it again. He opened three units in eighteen months, which he couldn't have done with SBA debt because he already had several loans. He paid a higher effective cost of capital, but he got speed and autonomy. For him, that trade-off was worth it. Luna: And I think that's the key takeaway — it's not the cheapest capital, but it's flexible, passive, and doesn't dilute control. For the right operator in the right situation, it's a powerful tool. Lucas: If these conversations have added something to how you think about growing your franchise business, we hope you'll consider tossing a few bucks into the tip jar. A couple of dollars a month genuinely makes a difference — buy me a coffee dot com slash fexingo. It keeps the show ad-free and lets us keep digging into these practical angles. Luna: Yeah, it's a small thing that adds up. No pressure, just if you've gotten something out of the show. Lucas: Alright — back to revenue sharing for a second. One more angle I want to touch on: how to structure the deal if you're the partner, not the franchisee. Luna: Oh, that's a good flip. So if you're a high-net-worth individual looking for passive yield in franchising, what do you look for? Lucas: First, the franchisee's track record. I'd want to see at least three years of profitable unit-level data, preferably across multiple units. I'd also look at the brand's system-wide performance — same-store sales growth, closure rate, and franchisee satisfaction scores. And I'd want a personal guarantee from the franchisee, even if it's limited. Luna: What about diversification? If I'm an investor, I don't want all my money in one franchisee or one brand. Lucas: Smart. Some family offices are building portfolios of revenue-sharing deals across different brands and geographies. They might do five or six deals at three hundred thousand each, spreading risk. And they'll often negotiate the same terms across all deals to keep it simple. Luna: And the returns? What's realistic? Lucas: If you underwrite carefully, you can target an internal rate of return of twelve to fifteen percent — and that's with a five- to seven-year horizon. That's competitive with private credit, and without the interest rate risk. But you need to do your homework on the operator. Luna: So it's a two-sided market — franchisees looking for capital, investors looking for yield. And the matchmaking is still pretty manual. Lucas: For now. I expect we'll see more platforms emerge, maybe even something like a marketplace. But the best deals will probably always come through relationships. Luna: Alright, Lucas — good topic. I think we gave listeners a real toolkit here. Lucas: Hope so. For anyone considering it, do the math first, talk to your franchisor, and find a partner who shares your time horizon. That's the recipe.