Franchising with Real Estate Component - anyone ever done this?

Question

Hi everyone!

I’ve been around BP for awhile now, but never really posted - so I apologize if this is out of left field.

I founded a business operation in 2014 that requires a significant amount of real estate (usually 6,000-12,000 sq/ft) per unit. Instead of leasing property from landlords and dumping a bunch of money into their building, I would like to own/build the asset and franchise the business operations across the region and nation.

Does anyone have any clever strategies or experience with investors coming in on the real estate component with an operator at the ready?

Thanks in advance for your help!!!

Tim

Daniel McNulty · Answer

@Tim Wirick

It’s certainly an interesting idea. You may find it tough to limit the inherent conflict of interest between your franchise business and the real estate structure.

There would also be more idiosyncratic risk than most people want from their real estate. That much exposure to the underlying business they might prefer equity upside of the franchiser.

Tim Wirick · Answer

@Daniel McNulty -

Thank you for responding. And I appreciate your feedback.

Here’s what I’ve been thinking:

As a way to limit the upfront capital required from the franchisee, the real estate would be owned by the franchisor (me) and the investors. There is a small amount of capital required for this specific operation which has its own advantages.

The thought also being - diversify the risk and reward between two parties and limit the focus to their individual areas of expertise.

I have a lead source for the franchisees and am confident in the conversations I’ve had from others who would like to use my model.

I’ve also considered focusing on investors who are considering the 1031 Exchange and possibly those investors specializing in Opportunity Zones.

Finally, it’s also been suggested I consider a REIT.

There seem to be a lot of strategies out there and I’m trying to garner the best feedback possible (and from as many perspectives as possible) on the varying paths forward.

Do you have any thoughts or suggestions on any of the above strategies?

Thanks!

Tim

Daniel McNulty · Answer

@Tim Wirick

That’s not an uncommon requirement in the franchise model. The problem most franchisees have is the upfront capital to get it off the ground.

It’s normally a few hundred thousand up to a few million. The more capital you incorporate into the model the more limited your potential franchisee base is.

It’s also common for people to borrow to start their franchise, so they may run into borrowing limits the larger the capital requirement is.

That being said many franchises require real estate purchases and the franchiser can be intimately involved in that process. Just depends on the nature of the business you are attempting to stamp out.