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This article is based on a video originally recorded on Visa Franchise YouTube channel.
So for the Subway franchise, the investment amount on the low end is $100,000 and the investment amount on the high end is $342,000. There’s 23,800 franchise concepts in the U.S. with zero corporate units. As I mentioned, the marketing fee is substantial, 4.5%, nearly double the industry average. Royalty fee at 8.0%, that’s significantly more, 2.7% higher than the average for food and beverage concepts.
Subway Franchise
Food and beverage concepts generally have tighter margins where compared to some service franchises say in the educational space where the margins are higher and a large part of the royalty fee is going to creating the curriculum, updating the curriculum where, for Subway, and franchises such as Subway franchise, you know, oftentimes you’re buying the products from third parties or preferred vendors. And it’s really important to look at, you know, is Subway making from that or are other food and beverage franchises making money from those vendors and chargebacks? It’s an important thing to look at, but overall having a royalty fee at 8%, I think that is pretty difficult to justify, especially when you look at the stats for Subway.
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Subway Closures and Location Losses as a Red Flag
Back in 2016 at the beginning of the year, they had 27,129 locations around the United States. Now we’re looking at the end of 2019. So fast forward four years, they’re down to 23,000 locations. That’s nearly a 3,500 locations that have…basically the system’s been depleted of those locations. Over the last 4 years, they have closed over 5,000 subway locations while they’ve only added around 2,000 locations. That’s a serious issue when you look at, you know, we were talking about ratios for other franchises like McDonald’s, for example, where for Subway, every unit that opens there’s nearly three units that close, and that’s not a very promising ratio.
If I was in the position of opening up a Subway, knowing that three of my fellow franchisees had closed or were in the process of closing when I’m going about opening up my first location. So really important to understand why they’re closing. Is it operational? Is it because they’re…created too many Subways nearby? What is the reason?
SBA Study on Subway
Some of the minimum net worth requirements are to own a subway is $80,000 and then the applicant must have liquid assets totaling $30,000.
So with that being said, you can see that a lot of subway franchisees will leverage finance from the SBA, Small Business Loan Administration, for example, where there’s been tens if not hundreds of loans issued to subway franchisees and then a later live stream, we’ll be reviewing the SBA loan data for top franchisees…top franchise systems, such as Subway. So we can see for this, for example, that it is eligible for SBA loan finance, and we will have more information in terms of the particular success and the default rate of SBA loans issued to Subway franchisees.
Minimum Net Worth Required
Again, minimum net worth required to own a Subway is $80,000 and the applicant must have liquid assets totaling at least $30,000. So looking back at the subway profile, you know, probably a reason that a lot of subway franchisees had to close is they might’ve run out of cash, and they couldn’t pay their debt servicing. Especially for those Subway franchisees that have opened up multiple locations, you hit a crisis like the coronavirus, your sales are down 70%, 80%, 90% for a few weeks or a few months, you can’t pay your loan off, you still got to pay rent, that’s when you can run into a lot of issues.
So I can imagine there have been over the years, a lot of over-levered Subway franchisees, where banks might have traditionally been more accommodated to issuing loans given the branding of Subway and the sheer number of locations without even really looking at how many locations have been closing compared to locations opening up. And you can see on that chart here, red is the number of closed.
Subway’s FDD: Franchise Disclosure Document
And let’s go real quick through…right now, I’m going to go through the FDD for Subway. Just toggling the screen. Okay. So for Subway, they don’t disclose an item 19. So in terms of knowing exactly how much you’re expected to make or really historically how much people have been making from a Subway, we went through the FDDs of the last five years, and they’re not disclosing these numbers.
Now, that doesn’t necessarily mean the financials are so bad, but in our experience for a franchise system with over 100 locations and Subway, in fact, has over 20,000 locations, and they’re not disclosing financial performance, I’d say that’s a huge red flag, and you have to be very careful looking at the profit and loss of existing locations. And it’s a little easier if you’re buying an existing Subway franchise, you will have that information during your due diligence, but it’s a little more problematic for opening up a new location.
