In October, Anchored Tiny Homes founders Colton and Austin Paulhus filed for Chapter 11 bankruptcy protection after abruptly shutting down operations last summer. Months earlier, the tiny home manufacturing brand partnered with the development firm Franchise FastLane.
Colton Paulhus emailed franchisees August 1, stating in part, “Along the way, however, we [were] met with a couple of unexpected events that accelerated the need for the investment capital.”
Don Tarinelli of Franchise FastLane, meanwhile, said once the organization knew of ATH’s financial problems, “we made them pause” on selling new territories.
“We had a handful of candidates that were ready to sign franchise agreements and we wouldn’t send them,” said Tarinelli, the company’s executive vice president of franchise development. “Anchored Tiny Homes was not happy with us about that, but it was the right thing to do when we realized where the brand was at.”
Franchise development and sales firms can expedite growth for brands—and in plenty of cases, are successful in doing so. But, like any business arrangement, it comes with risk for either party. These organizations exist to make money. That motivation can entice firms to oversell a franchise in one way or another.
In an email this fall, a FastLane representative said: “We are committed to responsible franchise growth, and we take very seriously our responsibility to the brands and franchisee candidates we work with and the communities they serve. We were surprised and deeply disappointed by the recent developments with Anchored Tiny Homes as this didn’t align with the information provided during our brief engagement.”
FastLane analyzes emerging brands’ financials, including evaluating franchise disclosure documents and unit economics, talks with franchisees and brand executives to get a better scope of the company and performs what it calls a SWOT analysis (strengths, weaknesses, opportunities and threats).
The brand named a new president and chief operating officer, Tim Koch, in October. FastLane touts 20-plus clients in its portfolio, including Bloomin’ Blinds, The Brothers That Just Do Gutters and EverLine Coatings and Services.
‘It can’t be a short-term view of thinking’
Brands with just one or two units can certainly launch a successful franchising program, but about 95 percent of franchised concepts don’t make it to 100 units, said John Rotche, CEO of Franworth, a franchise development and sales company.
“I don’t believe it’s because founders aren’t great people, that their brand or the market isn’t viable,” Rotche said. “I think they lack capital, both financial and intellectual capital.”
As Franchise Times columnist Alicia Miller wrote in August, there are full-service franchise development agencies that charge $100,000 to $250,000-plus for a package of services—and those that then handle franchise sales get a commission, too. Researcher Frandata, meanwhile, tracks about 9,000 brands and less than half of them are still actively franchising.
Franworth receives more than 400 applications a year from brands looking to grow their programs. Of those, the company accepts one every two years or so. Rotche, who founded Franworth, said he looks for brands in early stages with at most a dozen locations. “We like that because we’re able to come in and help establish the culture of the franchise community early on,” Rotche said. “We’re able to ensure that the systems that these early-stage franchises are investing in are solid, well-built systems that are scalable.”
Franworth backs its clients with its capital, systems and reputation. Franworth has seven franchises in its portfolio, including Milkshake Factory, SugaringLA and MosquitoNix.
Related: Franworth Invests in Florida Pest Control Concept
“The company looks for passionate founders with a drive to grow their brands,” Rotche said. “It can’t be a short-term view of thinking. This isn’t a ‘get rich quick’ scheme. The franchisors shouldn’t be looking to scale, flip and sell to a private equity firm in a couple of years either.”
For franchisees, investing in an emerging brand isn’t easy. Sure, owners have their pick of more territories, and getting in at the beginning can have its advantages, but you don’t get the data that comes with established franchises.
“We know how to scale. That does not mean selling units. That’s part of it, but it is awarding units to the right franchisees,” Rotche said. “How do you build a sustainable system nationally? Because if we do our job right, we will now create brand value. And brand value, in addition to unit value, is an amazing thing for franchisees.”
Fransmart’s brands include Cilantro Taco Grill, The Halal Guys, Glo30 Skincare and The Swing Bays. It seeks out brands it can scale to 500 or more units in seven to 10 years, CEO Dan Rowe said.
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Fransmart has similar vetting standards as Franworth and FastLane, such as strong unit economics and the scalability of the concept. The company sells only multi-unit deals, rather than single-unit ones—an unusual approach for brands just getting off the ground.
“We only work with people that are already successful franchisees. If it’s a money group, they can’t buy unless we pair them up with an operating person,” Rowe said. “Sometimes franchisees are like, ‘I got a lot of money. Don’t tell me what to do.’ We won’t see those franchise deals. We won’t sell to people like that.”
FranDevCo—with clients such as Chatime, MosquitoNix and Scoop Brothers—doesn’t have a “one size fits all” approach in its development strategy, Chief Operating Officer Drew Chalfant said. Unlike some other firms, FranDevCo only takes on already-franchised brands.
“We bring brands in that are already actively franchising, where franchise development has been a pain point for them, and we plug them into our system, where we have a proven process of vetting franchisees,” Chalfant said.
Sometimes brands come to FranDevCo and they’re not ready yet for the firm’s services, but they return in a few years when they’re “FSO ready,” Chalfant said. The company vets more than 500 brands a year, but takes on only four or five brands annually.
“One of the main things we look for is, is this a business that I would want my father to invest in as part of his retirement? Is this a business that I would say to one of my college buddies, ‘Hey man, if you’re looking for something to do, this is worth taking a look at,’” Chalfant said. “A brand that we look at this year, we may say to ourselves, ‘My goodness, if only we could have gotten a hold of them two years ago.’ Or sometimes we say to ourselves, ‘This is really, really cool, but the market’s just not ready.’”