Franchise Deep Dive: The Rise and Fall of Anchored Tiny Homes

Introduction

Today, we will look at a cautionary tale of a franchise that grew too quickly, had unproven franchise founders, and flamed out. Was it deceit and lies? Was it incompetence? Was it some combination of the two? Let’s dive in.

Anchored Tiny Homes (ATH) began as a promising solution to the housing crisis, offering accessory dwelling units (ADUs) through a franchise model. ADUs are small buildings (1000 sqft or less) that are used as small rental homes, granny flats, or detached offices for homeowners. Founded in 2019 by Colton Paulhus and his family in Fair Oaks, California, the company quickly expanded, boasting $95.2 million in gross sales across 47 corporate owned territories by 2024. The company marketed itself as the nation's leading custom ADU provider, attracting franchisees with the promise of high returns and a mission-driven approach to housing.

They began selling franchises in 2022 and by their demise in 2024 had sold hundreds of franchise territories, most of them unopened. This massive growth was fueled by a few things. One, they had large earnings claims in their Franchise Disclosure Document which only included corporate locations. The country was suffering from a housing crisis and the narrative made aspiring franchisees see this as a safe investment. The franchise brokers saw the rush of leads to the franchise and began sending more and more candidates to the brand which created a “feeding frenzy” type of environment where buyers were pressured to make their decision quickly or else their territory would be sold to someone else. Lastly, they were using an outside franchise sales organization whose focus is on selling units and not managing the new franchisees once they come on board.

Signs of Trouble

Despite its rapid growth, underlying issues began to surface:

Financial Mismanagement: Reports indicated that customer deposits were used to pay off existing debts, drawing comparisons to a Ponzi scheme. IMKAT Construction

Lavish Spending: Company funds were allegedly used for personal luxuries, including a $250,000 Bentley and a $100,000/year podcast team. IMKAT Construction

Operational Failures: Franchisees reported a lack of support and unfinished projects, leading to customer dissatisfaction and legal issues. ABC10

As troubles mounted, growth continued. The franchisor was supposed to be managing the onboarding of dozens of franchisees at a time while also managing their business empire that encompassed most of Northern California. It is unlikely they could have hired and trained corporate staff quickly enough to support all the new franchisees, and they also had to manage almost $100M worth of projects their corporate locations sold at the same time. Oversight of critical tasks became inevitable.

This is where the details get murky. At some point, a massive wave of complaints from their customers in Northern California started getting national attention. They had dozens of projects, each valued for over $100,000, unfinished and in some cases not even started. The lawsuits soon followed.

In July 2024, ATH abruptly ceased operations. The California Contractors State License Board suspended the company's license after discovering multiple violations, including collecting payments without performing work. Subsequently, the Better Business Bureau revoked ATH's accreditation.

Founders Colton and Austin Paulhus filed for Chapter 7 personal bankruptcy later that year, revealing significant debts and personal expenditures. Investigations by state regulators and the FBI are ongoing, with numerous lawsuits filed by affected homeowners, subcontractors, and franchisees.

Essentially, the entire franchise imploded on itself and the franchise owners lost everything they invested. There were a few franchisees, almost all with extensive business backgrounds, who were able to take the training from Anchored Tiny Homes and successfully open their own ADU business. Everyone else lost everything.

Lessons for Prospective Franchisees

The ATH case underscores several critical considerations for individuals exploring franchise opportunities:

1. Due Diligence: Thoroughly research the franchisor's financial health, operational history, and legal standing. The Tracer Franchising Research App (app.tracerfranchising.com) ensures you ask the right questions, at the right time, to the right person. It isn’t all encompassing but it is a great start.

2. Beware of Rapid Expansion: Excessive growth can strain resources and infrastructure, leading to systemic failures. All because it is growing quickly does not mean it’s a great franchise. In fact, it can mean they aren’t allowing prospective buyers to do the amount of research needed to know if it is a great business or not. Do not listen to the hype on online franchise lists, brokers, or franchise sales people.

3. Scrutinize Financial Practices: Ensure transparency in how customer funds and franchise fees are managed. Read the Item 21 in the FDD and have an accountant look over their audited financial statements. Franchisors don’t have to provide these for their first three years in business, which is yet another reason why you shouldn’t go with a brand new franchise.

4. Assess Support Systems: A robust support network is essential for franchisee success; its absence can be detrimental. Is the support team growing to match the number of new franchisees?

5. Evaluate Leadership Integrity: The ethical standards and business acumen of the leadership team are pivotal to a franchise's longevity. Do extensive research on their business practices, read the reviews of corporate locations, and look up any legal troubles they had in the past.

6. Longevity: New franchise founders do not have a proven track record making the business a significant risk. Some founders start great and the stress grinds them down over the years. Pick a franchise with an executive team who have been in this franchise for a long time or have extensive franchisor experience at other brands. Let experienced business owners take the risk on new founders because they have the acumen, and financials, to continue the business if the franchisor shuts down.

7. Regional Preferences: Even if this franchise didn’t implode, it was unlikely franchisees were going to find the kind of success that the franchisor did in their corporate locations. This is because California had just passed a law removing zoning restrictions that created a massive explosion of ADU construction in 2022. A few states followed suit but this was not a national trend. Many of the buyers was not aware of this regional trend that propelled the growth of the corporate location and erroneously assumed where they lived would have the same demand as in Northern California. Franchise buyers must do local due diligence to ensure demographic and consumer trends align with any national trends that they belie.

In conclusion, the franchise research process cannot be rushed. Even if you do all the due diligence in the world and everything looks great, an unproven brand can still flame out in a few years. Choosing to own a franchise instead of starting a business from scratch is supposed to mitigate your risk so why invest in a high risk franchise?

Work with me to get objective and data driven guidance that incorporates lessons like these into the process. If you prefer to work alone, you can still get follow my research process by using my app: app.tracerfranchising.com