Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Micro-Investing to Fund Growth
Transcript
- Lucas: Luna, when I say a franchisee raised a hundred and fifty thousand dollars from two hundred local investors to open a new location — no bank, no private equity — what comes to mind? Luna: Honestly? It sounds like a Kickstarter for a burrito shop. But I know there's more to it. Lucas: It's actually a lot more structured than a Kickstarter. It's called micro-investing through Regulation Crowdfunding — Regulation CF — and it's quietly becoming a real option for franchisees who want to expand without giving up control. Luna: Okay, so Regulation CF — that's the SEC rule that lets companies raise up to five million dollars from non-accredited investors, right? Lucas: Exactly. It was part of the JOBS Act, and the limit was raised from just over a million to five million in 2021. For franchisees, it means you can pitch your expansion to anyone — your customers, your local community, even your neighbors — and they can invest as little as a hundred bucks. Luna: So it's not charity, it's not a donation — they get equity or debt? Lucas: Most franchisees I've seen use revenue-sharing notes. That's a debt instrument where investors get a percentage of top-line revenue until they've received a target return — typically one point five to two times their investment. So if you put in a thousand dollars, you might get back fifteen hundred over three to five years. Luna: That's a pretty attractive pitch for someone who wants to support a local business and get a return. But what's the catch for the franchisee? Lucas: The biggest catch is the administrative burden. You have to file with the SEC, provide audited financials, and pay a funding portal — a platform like Mainvest or Wefunder — which takes a cut, typically around seven to ten percent of funds raised. Plus you've got ongoing reporting obligations to your investors every quarter. Luna: So it's not exactly passive. But I'm guessing for a franchisee who can't get a traditional loan — maybe they're newer, or their credit isn't perfect — this could be a lifeline. Lucas: That's exactly the profile. Let me give you a real number: a multi-unit Subway franchisee in Ohio wanted to open a new location in a neighborhood he already served. Banks were offering him terms he didn't like — high interest, personal guarantee. So he went on Mainvest with a target of a hundred and fifty thousand dollars. He hit it in thirty days from two hundred investors, most of whom were existing customers. Luna: Two hundred people putting in an average of seven hundred and fifty dollars each. That's not a huge check for most folks. But together, it adds up. Lucas: It does. And the marketing effort to get there was intense. He did email blasts to his loyalty list, put up flyers in the store, posted on local Facebook groups. The funding portal helped, but the heavy lifting was his own hustle. The result? He opened the store debt-free, no personal guarantee, and now he sends his investors a quarterly update with revenue numbers and a small payment. Luna: And the investors feel like they're part of the business. That's a pretty powerful brand loyalty loop. Lucas: It is. And it's not just Subway. I've seen micro-investing used by franchisees in the quick-service space, in fitness — even a franchisee of a popular lawn care brand raised capital this way to expand into a new territory. The common thread is that they're all local brands with a strong community connection. Luna: But what about the numbers that don't work? I'm guessing not every offering succeeds. Lucas: You're right. Industry data from the Crowdfunding Professional Association shows that about fifteen percent of Regulation CF offerings fail to reach their minimum target. And if you don't hit your minimum — typically set at fifty to seventy percent of the goal — investors get their money back, and you're left with nothing but legal fees. So you need to be confident you've got the network to pull it off. Luna: Fifteen percent failure rate is not trivial. And I imagine the due diligence on the franchisee side is also intense. The franchisor has to approve the raise, right? Lucas: They do. Most franchise agreements require the franchisor to approve any outside financing. Some are fine with it — they see it as de-risking the unit. Others are wary, especially if the offering documents create obligations that conflict with the franchise agreement. So you need to loop in the franchisor early. Luna: That feels like a hidden friction point. If the franchisor says no, you've wasted weeks of effort. Lucas: Exactly. That's why the smart franchisees have a conversation with their franchisor before they even start the paperwork. A couple of franchisors I've spoken to have actually started building micro-investing into their approved financing programs — they see it as a way to strengthen local ownership. Luna: That's a big shift from the old model where the franchisor wanted all franchisees to be either independently wealthy or bank-financed. The landscape is opening up. Lucas: It really is. And the numbers back it up. In 2025, Regulation CF offerings raised over eight hundred million dollars total, according to SEC data. Franchise-related offerings were a small slice — maybe five percent — but growing fast. I think we'll see more franchisees use this as a tool, especially for single-unit expansions where the amount needed is under five hundred thousand dollars. Luna: Now, you mentioned Mainvest a few times. Are there other platforms that franchisees should know about? Lucas: Mainvest is probably the most franchise-friendly — they specifically market to brick and mortar businesses. But you've also got Wefunder, which is bigger but more tech-heavy, and LocalStake, which focuses on local businesses. The key is finding a platform that understands the franchise model — because the offering documents need to reflect the ongoing royalty payments and the franchisor's control. Luna: And I'm guessing the interest rate — or the target return — has to be high enough to attract investors but low enough that the franchisee can still make a profit. What's the typical range? Lucas: For revenue-sharing notes, the target internal rate of return is typically between eight and twelve percent. That's competitive with other alternative investments, but it's not cheap money. A franchisee needs to model whether their projected revenue can support those payments. If the store does well, it's fine. If it struggles, the revenue share still kicks in, which can squeeze margins. Luna: So it's not free money. But for a franchisee who can't get a bank loan, or who wants to avoid a personal guarantee, it's a tradeoff worth exploring. I'm curious — do investors ever get any governance rights? Lucas: Rarely. In most revenue-share deals, investors have no voting rights, no board seat. They're passive. That's actually part of the appeal for franchisees — they retain full operational control. The downside for investors is that they have no say if the business goes off track. But that's the nature of the instrument: you're betting on the franchisee's execution. Luna: And the franchisee's track record matters a lot. If this is a first-time franchisee, I imagine it's harder to raise money than someone who already has three successful units. Lucas: Absolutely. The platforms usually require some operating history. You can't raise for a startup concept — you need at least one unit open, ideally profitable. That's another reason it works well for multi-unit franchisees: they have proof of concept. Luna: Let's talk about the regulatory side for a second. Regulation CF requires the franchisee to provide financial statements, sometimes audited. For a small operator, that's an extra cost. Do you see that as a barrier? Lucas: It can be. If you're raising under a hundred and twenty-four thousand dollars, you only need reviewed financials — cheaper but still a few thousand dollars. Above that, you need audited statements, which can run ten to fifteen thousand. That's a real cost. But compared to the cost of a bank loan — the fees, the personal guarantee — it's often comparable or better. And you're not taking on debt that sits on your balance sheet in the same way. Luna: So the math can work. But I think the key variable is the franchisee's ability to market the offering. If you're not active on social media, don't have an email list, don't have a loyal customer base, this model probably isn't for you. Lucas: That's the honest truth. The platforms provide a marketplace, but they don't do your marketing. The most successful raises I've seen — the Subway franchisee, a Smoothie King operator in Texas — they all had a strong local following and they worked it. One of them told me he spent two hours a day on the raise for six weeks. That's time away from running the business. Luna: So it's a commitment. But the payoff is a new store that's partially owned by your customers. That's a different relationship than one with a bank. Lucas: And that relationship can be a competitive advantage. When your investors are also your customers, they have a financial incentive to bring in referrals. Some franchisees report that their micro-investing stores outperform their bank-financed stores on same-store sales, because the community is more engaged. Luna: That's a powerful data point. And it suggests that the model isn't just about access to capital — it's about building a different kind of business. Lucas: Exactly right. And speaking of building something different — this might seem like a tangent, but it's actually connected. A lot of what makes micro-investing work is that listeners — people like you — are curious about these new tools and how they fit into the bigger picture. And this show exists because a small group of those listeners chips in monthly through buy me a coffee dot com slash fexingo. That support literally funds the research and production that lets us bring you these specific, concrete conversations every week. Luna: Yeah, it's a listener-funded model, and it keeps the episodes ad-free and focused on real numbers. It's not a big ask — just if the show has helped you in your own business thinking, it's a way to keep it going. Lucas: Exactly. And honestly, that community-driven funding is a thread that runs through today's topic too — whether it's micro-investors in a franchise or listeners supporting a podcast, it's about people pooling small amounts to create something that wouldn't exist otherwise. Back to the nuts and bolts: I want to talk about one more platform that's gaining traction — Honeycomb Credit. They specialize in local business investment and have a specific franchise track. Luna: Honeycomb — I've heard of them. They do community-backed loans, more like a traditional bond structure than revenue sharing, right? Lucas: Yes. They offer fixed-rate loans, typically five to seven percent, with a fixed term. That's simpler for the franchisee to model — you know exactly what your payment is every month. But it's harder for the investor because they don't participate in the upside. Still, some franchisees prefer the predictability. Luna: So now we have at least three models: revenue-sharing notes on Mainvest, equity-like structures on Wefunder, and fixed-rate loans on Honeycomb. Plus the traditional bank loan. It's a real menu. Lucas: It is. And the smart franchisee will compare the effective cost of capital across these options. A revenue-share note that targets a twelve percent return might actually be cheaper than a bank loan at eight percent if the store's revenue grows faster than projected — because you're sharing a percentage of revenue, not a fixed dollar amount. Luna: So it aligns incentives — if the business does well, the franchisee keeps more, but the investor also gets more. That's the theory, at least. Lucas: And the practice, in many cases. But I'll leave listeners with a caution: the failure rate I mentioned — fifteen percent of offerings don't hit their minimum. And even among those that do, not every store succeeds. So micro-investing is a tool, not a silver bullet. It works best for franchisees with a track record, a strong local brand, and the willingness to do the marketing work. Luna: And for investors, it's a way to put money into something you can see and touch — not just a ticker on a screen. I think that's a big part of the appeal. Lucas: Absolutely. And as the regulatory environment evolves — the SEC is considering whether to raise the Regulation CF cap again — we could see even more franchisees tapping this source. It's worth watching.