Franchising has gone through a series of evolutionary stages, the latest is finally upon us. The investor passive franchise ownership model has been picked up and adopted from the market segment that it was developed in and is rolling out across franchising.

This is not like buying and selling stock. The Passive franchise owner signs the franchise agreement, owns their entire franchise business, puts up the funding and then contracts with a management group arranged by the franchisor who will stand up then run the business for the investor for a Management Fee.

If you have been around for a while you may recognize the model.  Just like semi-absentee franchises were largely proven in the hair care business, passive franchises were largely proven in the hotel business. For years I have referred to it as “The Ritz Carlton model”, but in truth it was used by many hotel brands to grow their footprint.

The hotel model is that the owner of land or an existing hotel property could go to Ritz-Carlton and contract for them to get the real estate ready to operate then run it under a management contract.

This passive model is the next logical step in an evolutionary process for the franchise industry. When I started in franchising 30 years ago most franchise owners were single unit owners, with a small number being multi-unit owners. Over time, shifts in workplace loyalty and how buyers leveraged franchise brands meant that more owners are multi-unit owners and many of those are semi-absentee.

More owners growing multi-unit and multi-brand empires means they need proven and efficient ways to manage those. The approach has been that a multi-unit-brand owner would build their own corporate staff for their holdings to handle all the tasks of running the units or territories. But that can sometimes be slow and complicated as owners diversify.

We have been watching a few franchisors testing passive models outside of the hotel space. It looks like the model is settling in as the next big shift in franchising. To a small extent this new model serves owners already in the franchise space. More likely this model will be leveraged by wealthy individuals, people using specialized immigration visas, family offices and investment funds.

This will not likely be a fit for buyers looking for single or small multi-unit purchases. The portfolio that the management company will run has to be big enough that they can devote time, energy and staff to running your operations. Will also not fit investment funds with a mandate to purchase existing units until there are pools of these passive operations that enter the resale market.

In the case of one group I am watching, the new owner commits to purchase an entire market and that market will be assigned a number of projected units by the franchisor. Once the owner approves of the concept they contract with the franchisor and the management company. The costs to open each unit or territory will go to the new owner as they are needed.

The new owner can pick a large market like Denver, Dallas or Los Angeles. Alternatively they can pick a smaller market that still has enough potential units for the management company to devote resources. Multiple market acquisitions are also a possibility.

In a semi-absentee model you are hiring a manager and a team then overseeing them. This is one step further removed in that the management company fills that role then briefs you on some schedule on the performance of your franchise.

So, is it really passive?  Well, I would say it is close, maybe spot on.  You are still investing the money to stand up the entire business and you may spend an hour or two a month interacting with the management company if everything is dialed in. but if you have other investments or a job then this is potentially a great model to help you balance the demands on your time as you scale up a franchise portfolio.

I have not seen any franchise brands rolling out this model on any notable scale where they don’t have substantial franchise experience. The brands I am watching have solid franchise executive teams as do the management companies. That experience behind the model may make it one to consider.

If you are an existing franchise portfolio owner, wealthy investor or a family office, this passive investor franchise model is a solution that can speed your growth and improve quality of life. The people running your business will be focused on your success all day, every day. You get to focus on growing your portfolio, your family, travel and more. I see this being a regularly used growth model going forward across the franchise industry alongside the existing owner operator, executive and semi-absentee models.

What is your success story? Let’s go find it!

George Knauf is a highly sought after, trusted advisor to many of the top franchise ownership groups in the world. With over 25 years of experience in both start-up and mature business franchise operations he is uniquely qualified to advise individuals that have dreamed of Building their own empires. Whether you have an existing portfolio or searching for your first franchise, he can help you to pursue your dreams. www.MyPerfectFranchise.com