Why Crowdfunding is Perfect for Franchising
Crowdfunding raises funds for a variety of companies and is perfect for franchising in particular, as it helps businesses build brand awareness through growth and through contact with investors. Crowdfunding requires disclosures that can help investors and issuers alike determine with whom they prefer to work. Crowdfunding also involves less risk than obtaining a business loan and provides businesses and their investors with secure financing to acquire real estate. Crowdfunding, while a relatively new idea, is already a viable option for businesses to acquire funds quickly and for investors to potentially earn returns. With crowdfunding, franchising is easier for businesses now than ever before.
Companies, especially small startups, traditionally struggle to obtain funding to develop their businesses. In the past, companies wanting to raise capital could only present their investment opportunities to accredited investors, limiting the pool of investors from whom small businesses could acquire funding. Because very few people can qualify as accredited investors, the majority of the public cannot easily participate in these types of private investment offerings.
The Jumpstart Our Business Startups Act, signed into law in 2012, now allows businesses to raise capital from both accredited and non-accredited investors. For certain types of offerings, the JOBS Act also loosened rules for how businesses can market to potential investors. In the past, private businesses wanting to raise capital could not legally advertise their capital raise to the public. Marketing private securities was only possible via word of mouth.
The JOBS Act creates provisions eliminating the prohibition of general solicitation. Now companies can therefore market and advertise their investment opportunities using all means of media communication, including television ads, newspaper ads, and social media.
Crowdfunding is becoming an increasingly popular way to secure funding for startups and small businesses. New rules under the JOBS Act have made requirements for raising capital less onerous. Additionally, having many different investors allows companies to retain control instead of outsourcing to one or two dominant investors, as is often the case with private equity or venture capital.
The Security and Exchange Commission’s Regulation Crowdfunding currently limits issuers to $1 million in funds raised during a 12-month period. The SEC recently announced, however, that effective March 15, 2021, the limit on how much money issuers can raise in a Reg CF offering will increase to $5 million.
While crowdfunding can raise funds for a variety of companies, it is especially ideal for franchises to secure funding to grow their franchise businesses. Below are a few reasons why crowdfunding is the perfect funding solution for franchise companies:
Successful brands with large customer bases already have a built-in crowd of potential investors. These franchise brands can more easily attract investment from their loyal followers, increasing chances of success in achieving fundraising goals. Crowdfunding a franchise can also help franchisees build a customer base even before it opens for business. If investors believe in a business enough to invest in it, they most likely will do whatever they can to support the business as well. Additionally, investors have an incentive to help a franchise business gain a customer base: the more money a franchise makes, the more money investors make as well.
Issuers raising funds via crowdfunding must disclose information required on Form C. Required information includes financial statements/financial information, shareholders owning more than 20% of a company, a company’s location, risk factors, etc. Most of this required information is available in a Franchise Disclosure Document, a document required for every franchise company that simplifies meeting Reg CF’s disclosure requirements.
Less risky than obtaining a business loan
A franchisee might feel the need to obtain a business loan to start a franchise unit. Business loans, however, often have high interest rates, especially for new businesses, as perceived risk is higher. Financial institutions may also require additional collateral, which could entail putting a franchisee’s home or other assets on the line. Notes and loans issued by a franchisee are backed by the assets of the business. Crowdfunding is therefore a much better option, as it requires no personal guarantees. Additionally, if an issuer raises business capital by issuing equity in its business, the issuer is effectively spreading the risk among its investors.
Secure Financing for Underlying Real Estate
Now that Reg CF limits will soon increase to $5 million, franchisees can potentially crowdfund the purchase of the underlying real estate of their franchise units or build on their own properties. Crowdfunding can therefore allow investors to participate in both the franchise business and real estate holding, creating a scenario in which both franchisees and investors can potentially enjoy the fruits of their labor sooner than previously possible.
Crowdfunding comes with obvious risks, as does any startup or investment opportunity, but it is more reliable than a bank loan and more accessible to small businesses than venture capital from accredited investors. Crowdfunding is especially beneficial for franchising because it helps build brand awareness and can potentially allow franchisees and investors to acquire real estate more easily. Crowdfunding also connects people professionally and helps create more jobs in communities. Franchising can now assist more people and communities with crowdfunding.