The Hydra 'Zee
Bold experiment wants money from the masses, for franchising
A flagship Forever Yogurt store in Chicago has new ownership—more than 60 investors and counting, each of whom signed a franchise disclosure document and pledged a few thousand or up to $25,000 to own a piece of the action.
The goal is raising $650,000, and Forever Yogurt’s CEO Mandy Calara believes that’s a sure thing. Then the corporate-owned store will become the property of a many-headed franchisee—call it the Hydra—or 60-plus franchisees rolled up into one legal entity and managed by an operating partner.
Yes, it’s as complicated as it sounds, and all will be well as long as the store thrives. Otherwise, expect those many heads to strike. As Calara is the first to wade into this territory—crowdfunding for franchises—the Federal Trade Commission and state regulators will be waiting to pounce as well.
A brave test
The experiment is called CrowdFranchise, Calara’s brainchild, to try to do for franchising what Kickstarter has done for filmmakers, tech start-ups and hundreds of other ventures. The idea is to solicit a whole bunch of small investors from the masses who together can pony up enough money to buy a franchise.
It’s never been tried for franchising before, but Calara thinks it’s high time. He’d been watching Kickstarter and Sprigster with interest—Kickstarter is the popular crowdfunding site for businesses in general launched in 2009, and Sprigster is the little-used site that tries to raise donations to help military veterans buy a franchise.
Then Calara came up short of expansion capital after a Chinese private equity firm invested less than he expected in Forever Yogurt. Why not turn to the crowd, he figured, both to allow individuals without enough capital to sample franchise ownership, and also to harness some of the raving fan energy certain franchise brands enjoy.
“Putting together a way for the community to be involved in a franchise brand,” is how Calara describes CrowdFranchise. “It seems like a perfect fit.”
The first try, selling that high-profile corporate-owned Forever Yogurt store, looks like a hit. “It was December 11, 2013, and we put one store on there to see how people responded,” he says, referring to the CrowdFranchise debut offering. “So far we’ve raised about $400,000 out of $600,000.” That was in just one month, and the investing window was to stay open for another 80 days.
“We’ve seen amounts of $1,000, $2,000 and $3,000 investments, and then there’s a $25,000 commitment and a $20,000 commitment,” he says. Rules governing crowdfunding, enforced by the Securities & Exchange Commission, are morphing right now, with many expecting looser laws allowing the solicitation of non-accredited investors. For now, though, Calara is sticking with accredited investors as defined by the SEC.
He’s also feeling his way through a second set of rules, the formidable regulations around franchising enforced by the Federal Trade Commission and individual states.
“The attorneys don’t even know what rules to follow,” Calara says. “I had to sit down with an SEC attorney and our franchise attorneys and put together the proper structure to allow us to sell one franchise to multiple people. So right now we have to go through this full disclosure process with each.”
Only accredited investors are allowed to invest in a security that is crowdfunded. Calara is hoping for modifications to Title III of the JOBS Act, which many expect by this spring, which would let in less well-heeled investors to take part. “It really is a game changer,” he says about that rule change, “because then it will allow average income participants.”
He hopes to entice well-known franchise brands to list their stores for sale on CrowdFranchise, or prospective franchisees who can’t raise the full franchise fee in a tough lending environment, or current operators who want to expand to a second or third unit and garner community investment, or fledgling restaurant chains that want to expand by franchising.
One example of that last category, Falafill in Chicago, has signed on, although CrowdFranchise has yet to land the established, big-name franchisor Calara covets.
Maher Chebaro, CEO and founder of Falafill, is giving the site a try as a way to sign prospects who don’t have enough capital on their own. Falafill has three restaurants and has never franchised before, which most would call a perilous endeavor even without the added complexity of crowdfunding.
Michael Daigle is the attorney at Cheng Cohen in Chicago who provided initial guidance to Calara on his quest to launch CrowdFranchise. He calls the idea “interesting” and gives Calara props for being first. “I’ve not found anyone else that’s done it,” Daigle says, and implies crowdfunding for franchises is sure to generate plenty of work for attorneys.
“In theory it shouldn’t be more complicated” than a typical franchise agreement, Daigle says. But “the reality is these investors may very well try to assert their individual claims based on the solicitation of their investment.”
As long as a store is well run and profitable, investors will be happy. If not—not so much. “That’s always the case,” Daigle says. He searched for lawsuits involving crowdfunding, which has only been allowed for equity investments since 2012 (before that only donations could be solicited) and didn’t find any yet. “It’s relatively new, and you’d expect there eventually would be litigation around the way that funds are solicited,” he says.
The larger rub for franchisors is disclosure compliance. “I think it will get a lot of attention,” Daigle says about CrowdFranchise, “possibly by the FTC but certainly by the states, with their franchise regulations. Everything needs to be buttoned up, so you can establish you’re fully complying with the franchise rules as well as the crowdfunding rules.”
Nick Powills would agree, but is glad such legal muck won’t stop Calara. He’s the chief brand strategist of Chicago public relations firm No Limit Agency, and Forever Yogurt is a client; Powills has been contributing advice to Calara to develop CrowdFranchise.
“The thing that shocks me the most is it’s so basic that no one thought of it before,” says Powills, and he admires Calara’s adventuresome spirit. “He knows when a good idea comes around in franchising, it pops quickly. So, let’s get this rolling and figure things out.”
Calara isn’t allowing all that “buttoning up” to obscure the promise of his idea. “I really enjoy entrepreneurship, taking part in something that’s new, and something that might bring some additional solutions to problems I’ve seen,” he says.
Then he adds the best reason of all to try a brave new experiment in franchise finance. “It should be a lot of fun.”
Beth Ewen is managing editor of Franchise Times. Send interesting legal and public policy cases to firstname.lastname@example.org.