Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Are Using Revenue Sharing to Fund Growth
Transcript
- Lucas: So we've talked a lot on this show about how franchisees fund their growth — SBA loans, conventional bank debt, rolling in personal equity. But there's another model gaining real traction in 2026 that flips the whole premise of franchise finance on its head. Luna: You're talking about revenue-sharing agreements, right? Where instead of taking on debt, franchisees bring in passive investors who get a cut of top-line sales. Lucas: Exactly. And it's not just a niche thing anymore. I've been tracking deals across a handful of systems — Jimmy John's, Sport Clips, some quick-service burger concepts — and the numbers are starting to pile up. One operator I spoke with raised $2 million from a group of passive investors at a flat 8 percent revenue share. Luna: Wait — 8 percent of revenue, not profit? Lucas: Revenue. That's the key. The investor gets paid first, before rent, before payroll, before the franchisee takes a dime. And that structure is exactly why some franchisees love it, and why others think it's a trap. Luna: Before we go deeper — quick honest thing. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. If these conversations have moved your work forward in some small way, that's the only reason we can keep digging into structures like revenue-sharing without ads getting in the way. Lucas: Yeah, and we really mean that. It's a small group that keeps the lights on, and it lets us stay independent. So — back to revenue-sharing. The basic mechanics are pretty straightforward. Lucas: A franchisee needs capital to open a new unit or buy out a neighboring operator. They find one or more passive investors — could be a high-net-worth individual, a family office, even a small fund. The investor puts up the cash, and in return, the franchisee agrees to pay them a fixed percentage of gross revenue for a set term, usually five to seven years. Luna: And there's no interest rate, no personal guarantee, no fixed monthly payment. The payment scales with how much revenue the store generates. Lucas: Right. So if the store does $1 million in annual revenue at an 8 percent share, the investor gets $80,000 that year. If the store does $1.5 million, the investor gets $120,000. The franchisee never owes more than that percentage, regardless of how profitable the store is. Luna: That sounds almost too good for the franchisee. Why would an investor agree to that instead of taking equity or charging a fixed interest rate? Lucas: Because the upside can be significant if the store performs well, and because the investor gets paid before virtually any other expense. Their return is tied directly to top-line growth, which is often easier to predict than bottom-line profitability in a franchise system with mandated supplier costs and royalty fees. Luna: But it's capped — they don't participate in the profit upside beyond that revenue percentage. Lucas: Exactly. But the counter-argument is that many franchise businesses have relatively predictable revenue ranges. A well-located Jimmy John's in a dense urban market might do $800,000 to $1.2 million annually. So an investor can model their return with reasonable confidence. And they don't have to audit profit and loss statements or worry about the franchisee's cost structure. Luna: So the investor's due diligence shifts from scrutinizing the operator's margins to evaluating the location, the brand strength, and the local market demand. Lucas: Precisely. And that's why we're seeing more passive capital flow into franchise deals through this structure. I've even seen a group of franchisees pool their own capital — they call themselves a 'franchise investment club' — and use revenue-sharing to fund a new brand rollout across three territories. Luna: That's interesting — franchisees becoming investors in each other's units. But let's talk about the risks. What happens if the store underperforms? Lucas: The franchisee is still obligated to pay the revenue share, even if the store is losing money. Because it's a percentage of revenue, not profit. So if the store does $500,000 in revenue but has $600,000 in expenses, the franchisee still owes $40,000 at an 8 percent share. That can accelerate a death spiral. Luna: And the investor has no liability for the store's losses. They just take their cut. Lucas: Right. So the franchisee bears all the operational risk. Which is why this structure works best for mature, stable concepts with proven unit economics. It's dangerous for early-stage or unproven brands. Luna: And what about the effective cost of capital? I've run some back of the envelope numbers. If a franchisee raises $500,000 at 8 percent revenue share, and the store does $1 million a year over a seven-year term, the investor gets $560,000 total. That's a 12 percent internal rate of return, roughly, if you assume the capital is fully deployed from day one. Lucas: But it's not debt — there's no amortization, no principal repayment. The franchisee keeps the $500,000 forever, and the investor gets paid out of cash flow. The effective interest rate is higher than 12 percent if you consider that the franchisee never repays the principal. It's more like selling a perpetual claim on revenue, but with a fixed term. Luna: So in good times, the investor does well. But the franchisee's cost of capital can exceed 15 percent or more, which is expensive compared to a 7 percent SBA loan. Lucas: That's the trade-off. The franchisee gets no personal guarantee, no fixed monthly payment, and preserves cash flow. But they pay a premium for that flexibility. And the investor gets a steady income stream that's senior to almost everything else. Luna: Are there any emerging legal or regulatory issues around this? I imagine some franchisors are starting to take notice. Lucas: Absolutely. A few franchisors have added clauses to their franchise agreements restricting revenue-sharing with third parties, arguing it's an undisclosed transfer of interest. Others require the investor to sign a non-disclosure and meet the same background checks as the franchisee. And there's a gray area around whether the revenue share constitutes a security, which would trigger SEC registration requirements. Luna: So a franchisee doing a handshake deal with a local doctor could accidentally be issuing an unregistered security. Lucas: Exactly. Most franchise lawyers I've talked to recommend structuring these as a simple contractual obligation, not an equity interest, and staying below the thresholds that trigger state securities laws. But it's an evolving area. Luna: What about the franchisee's exit? If they want to sell the store, does the revenue-sharing agreement transfer to the new owner? Lucas: That's a critical detail. Typically, the agreement is tied to the specific franchise location, not the operator. So if the franchisee sells, the buyer steps into the same revenue-share obligation. But that can reduce the sale price — a buyer might discount the purchase by the present value of future payments. Some agreements include a buyout clause where the franchisee can pay a lump sum to terminate the revenue share early. Luna: So it's a bit like a negative covenant on the asset. Makes sense. Lucas: Right. And that's one reason why revenue-sharing is more common for new unit development than for acquisitions of existing stores. When you're building from scratch, you have more flexibility to structure the capital stack however you want. Luna: So if I'm a franchisee listening, how do I evaluate whether a revenue-share deal makes sense for my next unit? Lucas: I'd start by modeling three scenarios: the store performs at the system average, at 20 percent above average, and at 20 percent below average. Then calculate the total payments to the investor over the term under each scenario. Compare that to what you'd pay in interest on an SBA loan of the same amount. Luna: And don't forget the time value of money — those revenue-share payments start immediately, while loan payments are back-loaded in a sense. Lucas: Exactly. And also consider the optionality. With a loan, you have a fixed payment schedule. With revenue-sharing, your payment scales with revenue, which gives you more breathing room if the store has a slow first year. But if the store crushes it, you're giving away a lot more. Luna: So it's really a bet on the volatility of the store's revenue. If you're confident in steady growth, debt might be cheaper. If there's more uncertainty, revenue-sharing provides insurance. Lucas: That's exactly the framework. And I think that's why we're seeing younger franchisees — particularly those without a ton of personal net worth or home equity — gravitate toward revenue-sharing. It gets them in the game without requiring a personal guarantee that could wipe them out. Luna: But the flip side is that they're giving up a significant portion of future cash flow. Over seven years, that can add up to hundreds of thousands of dollars. Lucas: Right. And that's the tension. It's not a free lunch. But in a world where bank lending is tightening for small business — and especially for franchisees without a multi-unit track record — revenue-sharing is filling a real gap. I expect we'll see more institutional capital enter this space, maybe even franchise-specific funds that specialize in these structures. Luna: So what's the one thing you'd tell a franchisee considering this today? Lucas: Get a lawyer who understands franchise finance, not just a general business attorney. Model the full term, including a sensitivity analysis. And negotiate the cap — some investors will agree to a total payment cap, say two times their initial investment, which protects you if the store outperforms wildly. Luna: That's a good practical takeaway. And for investors listening — what's your advice? Lucas: Don't just look at the brand. Look at the operator's track record, the specific location's demographics, and the term sheet's legal enforceability. Revenue-sharing is only as good as the agreement that governs it. And remember — you're taking revenue risk, not profit risk, which means you're first in line but also first to get squeezed if the franchisee mismanages costs. Luna: So it's a tool, not a silver bullet. And like any financial innovation, it works best when both sides understand exactly what they're signing up for. Lucas: Exactly. And we'll keep watching how these structures evolve. For now, it's one of the more interesting developments in franchise finance I've seen in the last few years.