By Matt Present
Ever nursed fantasies of walking into a bustling business in a hip neighborhood and skipping to the front of the line? And then, when someone asks you what you think you’re doing, you smile generously and say, “It’s OK. I own the place.”
If you have $1,000, fantasy no more.
Today marks the launch of CrowdFranchise, a new business founded by Forever Yogurt CEO Mandy Calara. He aims to apply the principles of crowdfunding — raising small amounts of cash from a host of interested parties — to the franchising market.
CrowdFranchise will offer up small stakes in ownership in exchange for corresponding investment from community members. Put in 2 percent of the cost to franchise, and you get to call 2 percent of the store your own — along with 2 percent of its profits and 2 percent of its voting share. “The real message here is that this is kind of an opportunity for us to explore a new way to open, support, finance new franchises,” Calara says. “We’re still going to operate and manage the store, but we want to try to do this from a community approach both for the equity and the ongoing decisions that would be made.”
Calara is offering up 50 percent of the equity in Forever Yogurt’s store on North Avenue, which also happens to be the chain’s most profitable location. “If we’re going to pilot this new way to own a franchise, to show that we truly believe in this idea, we thought it’d be a good idea to offer our best store, our flagship store,” he says. “If it does well, we can explore new stores and new cities and other franchise concepts that would work well in a community.”
In doing so, Calara says he will pioneer a concept that’s rich with potential. Being able to buy a meaningful stake in a business for $1,000 will enlarge the pool of partial owners significantly, thereby freeing up capital while simultaneously introducing a host of new folks to the principles of ownership and entrepreneurship.
“There are so many edges, and that’s what’s intriguing,” says Nick Powills, publisher of 1851, an online news source for franchise owners and a friend of Calara’s. “He’s got thousands of people who have inquired who really, really want to own a Forever Yogurt and just don’t have the money to do it. Now, Mandy can say, OK let’s talk about what you do have.”
While there have been community-funded grocery stores and other independent business, Calara believes he’s the first to meld community ownership with franchise agreements. Up until last year’s passing of the JOBS Act, which relaxed restrictions on raising capital, such an enterprise would have been illegal. Now businesses can solicit crowdfunded investments of up to $1 million — more than enough to cover most franchise fees.
He already has one customer ready to use the platform. Maher Chebaro, who founded Mediterranean restaurant Falafill in Lakeview in 2009, has been waiting to break into franchising until he nailed the restaurant’s menu and concept. “We’ve really been taking our time since opening,” he says. “2014 is our big year of franchising.”
Chebaro’s eager to expand Falafill’s footprint quickly, which means he needs to find capable franchisees with enough capital to float the six-figure investment. Not so easy. “We meet people all of the time who might be great operators but financially, they’re not there. This gives people a chance to open where they couldn’t open,” he says. “I think it’s a genius idea to get the community involved.”
As with any novel concept, questions abound, particularly with regard to the highly fragmented ownership structure. How will investors cash out? To whom can they sell their equity? How does a franchise recapitalize? And as CrowdFranchise invites more cooks into the kitchen, how noisy will it get? Democracy may be a political ideal, but it can be a clamorous way to run a business.
“The risk that would come along with this would be, I invest $10,000 to be a partner in this unit but I don’t have any say, same as if I buy 10,000 shares of Nike, they’re not going to let me meet Michael Jordan,” Powills says. “There will be some managing expectations.”
Calara acknowledges that these concerns exist, and he’s worked to iron many of them out in the run-up to launch. Investments will be overfunded so that each store has a buffer to achieve momentum before the coffers run dry. And if the reserve pool does run out, owners will be indemnified by leases that limit their liability against the crowdsourced owners. In essence, investors can’t lose more than they put in.
Owners will also be given monthly profit and loss statements, as well as access to an online platform, where they can vote about prospective changes — buying a piece of equipment, adding a new item — in proportion to their stake.
But other mechanisms, such as the ability to cash out, remain in flux. Consequently, Calara is holding off on charging any fees on CrowdFranchise until they get the bugs worked out. Currently, CrowdFranchise has no revenue model. Calara’s OK with that.
He’s even willing to admit that the launch of CrowdFranchise may represent a jumping off point more than an arrival. Franchisees could raise money through community websites instead of going to the Small Business Administration or a bank. “It doesn’t necessarily have to be this model.”