Sonic Franchise Cost Not Worth Profit Potential (2024)
Sonic franchises are distinctive drive-in restaurants focusing on a unique menu of quality, made-to-order food products and innovative technology. Sonic Franchising LLC (“Sonic”) licenses the operation of Sonic restaurants, which feature a variety of items such as specialty drinks, ice cream desserts, cheeseburgers, chicken entrees, hot dogs, and more.
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Sonic Franchise
The Sonic brand began in the early 1950s. Sonic has offered franchises since 1974. As of January 2021, there were over 3,500 Sonic restaurants operating in 46 states in the United States. There are 3,251 restaurants owned and operated by franchisees and 271 were owned and operated by an affiliate of Sonic.
Paul J. Brown has been a Member of the Board of Managers since December 2018. He also has been Inspire Brands’ Chief Executive Officer in Atlanta, Georgia since its formation in February 2018. In addition, he has been the Chief Executive Officer of Arby’s Restaurant Group, Inc. (“ARG”), an Inspire Brands brand since 2013.
How Is the Sonic Franchise Positioned in the Fast Food Industry?
Sonic is uniquely positioned to grow within the Fast Food industry after it was acquired from Inspire Brands which owns Arby’s, Buffalo Wild Wings, Jimmy John’s, Rusty Taco, Dunkin’, and Baskin-Robbin. Since Sonic has been around for almost 70 years and with the backing of a multi-brand restaurant company like Inspire Brands they have the management and capital to continue to grow in a competitive industry.
A comparable company to Sonic is Mcdonalds which has over 13,000 franchise and company-owned units, over 4 times the number of units Sonic has. However, Sonic has a sticky customer base due to its unique drink items and its drive-up business model.
How Much Is a Sonic Franchise?
The initial Sonic Franchise Fee is $45,000. You have to pay this upfront fee when opening a Sonic franchise.
Sonic Drive-In Franchise Initial Investment
| Type of Expenditure | Estimated low | Estimated high | To Whom Payment Is to Be Made |
|---|---|---|---|
| Franchise Fee | 45,000 | 45,000 | Sonic |
| Payroll | 56,000 | 137,500 | Your employees |
| Training, Travel and Living Expenses while Training | 5,000 | 33,500 | Hotels, restaurants and airlines |
| A- Team Trainers | 48,000 | 92,000 | Suppliers |
| Advertising Funds | 2,000 | 5,000 | Suppliers |
| Beginning Inventory | 30,000 | 140,000 | Suppliers |
| Security deposits, impact fees for utilities, utility deposits, business licenses and other prepaid expenses | 2,000 | 250,000 | Suppliers |
| Insurance Premiums | 10,000 | 20,000 | Suppliers |
| Additional Fund (3 months) | 5,000 | 25,000 | Suppliers |
| Miscellaneous Pre-opening Costs | 5,000 | 58,300 | Suppliers |
| Land | Variable | Variable | |
| Building and Site Work | 750,000 | 2,300,000 | |
| Restaurant Equipment | 175,000 | 260,000 | |
| Point-of.sale System (“POS”) and Digital Menu Housings (“POPS”) | 84,200 | 136,400 | Suppliers |
| Sonic Sign | 25,000 | 35,000 | Suppliers |
| TOTAL ESTIMATED INITIAL INVESTMENT (excluding land costs) | 1,242,200 | 3,537,700 | |
| OPTIONAL – Indoor Seating | 125,000 | 220,000 | Suppliers |
Owning a Sonic Franchise Requires Ongoing Fees
Royalty: 5% of Gross Sales Monthly
Brand Fee: .9% of Gross Sales Monthly
Advertising Cooperative Fee: 3.25% Monthly
The Food & Beverage industry has an average royalty fee of 5.3% and a marketing fee of 2.3%, indicating Sonic has a royalty fee slightly less than the industry average and a marketing fee slightly higher than the industry average.
How Much Do Sonic Franchise Owners Make?
Fiscal Year 2020
| Number of restaurants | Average Gross Sales | Median Gross Sales | Gross Sales Range | Percent of Restaurants that Attained or Surpassed the Average Gross Sales | Number of Restaurants that Attained or Surpassed the Average Gross Sales | |
|---|---|---|---|---|---|---|
| Company Drive-Ins | 267 | 1,346 | 1,240 | 701-2,818 | 42 | 111 |
| Franchise Drive-Ins | 3,200 | 1,633 | 1,540 | 379-4,717 | 44 | 1,402 |
| Total of Company Drive-Ins and Franchise Drive-Ins | 3,467 | 1,611 | 1,514 | 379-4,717 | 43 | 1,504 |
12 Months Ending December 31, 2019
| Number of restaurants | Average Gross Sales | Median Gross Sales | Gross Sales Range | Percent of Restaurants that Attained or Surpassed the Average Gross Sales | Number of Restaurants that Attained or Surpassed the Average Gross Sales | |
|---|---|---|---|---|---|---|
| Company Drive-Ins | 169 | 1,272 | 1,257 | 641-2,387 | 47 | 80 |
| Franchise Drive-Ins | 3,154 | 1,345 | 1,259 | 398-4,028 | 43 | 1,345 |
| Total of Company Drive-Ins and Franchise Drive-Ins | 3,323 | 1,341 | 1,259 | 398-4,028 | 43 | 1,424 |
Profits and Loss Data of Traditional Company Drive-Ins For 2019 and 2020 Fiscal Year
| 2019 Average | 2019 Margin | 2020 Average | 2020 Margin | |
|---|---|---|---|---|
| Gross Sales | 1,239,475 | 1,361,175 | ||
| Food | 294,236 | 23.7 | 324,587 | 23.8 |
| Paper | 39,331 | 3.2 | 41,230 | 3.0 |
| Delivery | 51 | 0.0 | 12 | 0.0 |
| Total Cost of Sales | 333,618 | 26.9 | 365,830 | 26.9 |
| Crew Salaries | 293,930 | 23.7 | 301,233 | 22.1 |
| Management Salaries | 52,182 | 4.2 | 48,716 | 3.6 |
| Total Wages | 346,111 | 27.9 | 349,949 | 25.7 |
| Bonus | 24,036 | 1.9 | 7,634 | 0.6 |
| Vacation, Holiday, Sick and Severance | 3,796 | 0.3 | 6,583 | 0.5 |
| Fringe Benefits | 7,123 | 0.6 | 5,390 | 0.4 |
| Workers Compensation | 5,293 | 0.4 | 4,104 | 0.3 |
| Payroll Taxes | 33,708 | 2.7 | 33,200 | 2.4 |
| Total Payroll | 73,956 | 6.0 | 56,911 | 4.2 |
| Utilities | 33,583 | 2.7 | 32,230 | 2.4 |
| Supplies & Office Supplies | 7,212 | 0.6 | 9,277 | 0.7 |
| Contract Services | 7,195 | 0.6 | 10,477 | 0.8 |
| BOS/POS Related | 6,099 | 0.5 | 5,402 | 0.4 |
| Card Fees | 24,902 | 2.0 | 34,903 | 2.6 |
| R&M | 20,487 | 1.7 | 23,908 | 1.8 |
| Laundry & Uniforms | 1,577 | 0.1 | 1,448 | 0.1 |
| Cash Over/ Short | 1,416 | 0.1 | 1,224 | 0.1 |
| Total Unit Controllable Expense | 102,470 | 8.3 | 118,869 | 8.7 |
| Local Advertising | 58,205 | 4.7 | 62,525 | 4.6 |
| National Marketing | 16,424 | 1.3 | 14,331 | 1.1 |
| Total Advertising | 74,360 | 6.0 | 76,856 | 5.6 |
| Property Taxes | 17,165 | 1.4 | 16,352 | 1.2 |
| Insurance | 5,573 | 0.4 | 7,634 | 0.6 |
| Royalties | 51,777 | 4.2 | 56,544 | 4.2 |
| Other | – | – | – | 0.0 |
| Total Property Tax, Insurance & Royalties | 74,515 | 6.0 | 80,531 | 5.9 |
| Total Reported Expenses | 1,005,570 | 81.1 | 1,048,945 | 77.1 |
| Drive-In EBITDAR | 233,905 | 18.9 | 312,230 | 22.9 |
Key insights
As seen in the profit and loss chart above, in 2019 an average Sonic franchise had an EBITDAR (Earnings Before Interest Taxes Depreciation Appreciation Rent) of $233,905 on $1,239,475 of sales. This represents a margin of 18.9%. But the franchisee will still need to pay for interest, taxes, and rent which would most likely bring the margin to around 10%. Therefore on a midpoint investment of $2,389,950 and a profit margin of 10%, it would take 20 years to get a return on your initial investment.
In 2020 an average Sonic franchise had an EBITDAR (Earnings Before Interest Taxes Depreciation Appreciation Rent) of $312,230 on $349,949 of sales. This represents a margin of 22.9% but the franchisee will still need to pay for interest, taxes, and rent which would most likely bring the margin to around 13%. Therefore on a midpoint investment of $2,389,950 and a profit margin of 13%, it would take 14.5 years to get a return on your initial investment.
The company is backed by a powerful restaurant firm Inspire Brands which will help push Sonic’s unique menu items and drive up business models. Sonic is in a great position to use new technology and automation to thrive in the growing fast food market.
Is the Sonic Franchise Profit Worth the Franchise Cost?
To assign a valuation multiple for Sonic franchises, we leverage estimates from DealStats, a database of acquired private company transactions sourced from U.S. business brokers and SEC filings. We reviewed the broader franchise industry as well as selling price multiples for larger systems like Burger King where more transaction data is available.
Under $1 Million Net Sales Estimated
Selling Price = Net Sales – 0.34 $1 Million – $5 Million Net Sales
Estimated Selling Price = Net Sales – 0.86 Over $5 Million Net Sales
When you go to sell one Sonic franchise based on a net sales multiple of 0.34 and net sales averaging $1,361,175 in 2020 it would sell for $462,000. This is significantly lower than the average investment of $2,389,950. That being said, although land costs are NOT included in the initial investment, the building costs are. Most Sonic franchisees are making their return back from building the Sonic from the ground up and selling the building together with the land to a REIT (real estate investment trust).
If you owned multiple Sonic franchises, you do have the ability to make more of your money back. Franchise owners with over $5 million in sales have a median multiple of 0.86 So, if you had 10 franchises this would be $13.6 million in sales. And you could sell your chain of restaurants for about $11.7 million. This still represents a loss when just considering the business and it is important to review the real estate costs/ eventual sales as well.
Sonic Franchisor Income Statement:
Sonic Industries Services Inc. Consolidated Statements of Income
| Jan 3,2021 | 29/12 ,2019 | 31/12 ,2018 | 07/12 ,2018 | Aug 31,2018 | |
|---|---|---|---|---|---|
| Revenues | |||||
| Franchise royalties and fees (includes $15,043, $10,323, $557, $2339 and $10,127 from Affiliates, respectively) | $245,801 | $194,729 | $10,714 | 46,911 | $182,570 |
| Management and support fees (includes $0, $8,837, $0, $1,802 and $8,330 from Affiliates, respectively) | – | 8,837 | – | 1,802 | 8,560 |
| Fund administration revenue | 13,863 | 11,953 | 652 | 3,024 | – |
| Lease revenue (includes $12, $31, $0, $16 and $1,559 from Affiliates, respectively) | 2,227 | 2,033 | 104 | 488 | 2,400 |
| Other | 6,892 | 713 | 32 | 103 | 418 |
| Total Revenues | 268,783 | 218,265 | 11,502 | 52,328 | 193,948 |
| Costs and Expenses | |||||
| Selling, general and administrative (includes $29,608, $27,234, $12,529, $0 and $0 to Affiliates, respectively) | 61,046 | 114,157 | 21,325 | 63,969 | 74,616 |
| Depreciation and amortization | 50,090 | 55,444 | 4,023 | 6,290 | 18,484 |
| Impairment of long-lived assets | – | 50 | – | – | 55 |
| Other operating expense (income), net | 3,579 | (23) | 30 | (159) | (107) |
| Total costs and expenses | 114,715 | 169,628 | 25,378 | 70,100 | 93,048 |
| Income (loss) from operations | 184,068 | 48,637 | (13,876) | (17,772) | 100,900 |
| Interest expense (includes $6,079, $5,009, $276, $1,319 and $4,560 to Affiliates, respectively) | 39,760 | 33,762 | 2,147 | 9,375 | 32,972 |
| Interest income (includes $8,220, $15,892, $276, $4,384 and $13,932 from Affiliates, respectively) | (2,480) | (16,502) | (324) | (4,653) | (14,608) |
| Loss on extinguishment of debt | 6,752 | – | – | – | 1,140 |
| Net interest expense | 44,032 | 17,260 | 1,823 | 4,722 | 19,504 |
| Income (loss) before income taxes | 110,036 | 31,377 | (15,699) | (22,494) | 81,396 |
| Provision (benefit) for income taxes | 17,944 | 5,422 | (3,689) | (6,776) | 17,342 |
| Net income (loss) | $92,092 | $25,955 | $(12,010) | $(15,718) | $(64,054) |
Sonic Income Statement Key Insights
In 2020 the Sonic franchisor had a profitable year. With a net income of $92 million and revenues of $269 million. The franchisor had a net income increase of 250% from 2019 to 2020. We can see the increase through an increase in revenues and decreasing costs from 2020 to 2021.
Sonic Unit Openings / Closings
System-wide Outlet Summary
| Restaurant type | Year | Restaurants at the Beginning of the Year | Restaurants at the End of the Year | Gross Change |
|---|---|---|---|---|
| Franchised | 2018 | 3,360 | 3,424 | 64 |
| 2019 | 3,424 | 3,329 | (95) | |
| 2020 | 3,329 | 3,251 | (78) | |
| Company-Owned | 2018 | 228 | 176 | (52) |
| 2019 | 176 | 197 | 21 | |
| 2020 | 197 | 271 | 74 | |
| Total Drive-Ins | 2018 | 3,588 | 3,600 | 12 |
| 2019 | 3,600 | 3,526 | (74) | |
| 2020 | 3,526 | 3522 | (4) |
Sonic franchises have been declining over the last three years averaging a closing of 36 units a year. However, company franchises have grown over this same period at an average of 14 units a year.
“I LOVE THE DIRECTION OF THE BRAND. IT’s INVESTING IN AUTOMATION. INVESTING IN THE CUSTOMER EXPERIENCE, IT SUPPORTS ITS FRANCHISEES AT A LOT OF DIFFERENT LEVELS AND A LOT OF DIFFERENT DISCIPLINES.” – MAX GELWIX, MULTI-UNIT FRANCHISEE IN CALIFORNIA
Conclusion
With a powerful restaurant firm like Inspire Brands supporting and backing the Sonic franchise and their commitment to keeping their restaurants updated with new technology and automation to ensure further customer satisfaction, Sonic is better positioned than most in the fast-food industry. That being said, fast food is not one of our favorite industries at Vetted Biz.
We strongly recommend you speak to at least 5 Sonic franchisees to better understand the financials (see questions to ask). Think Sonic franchise is the right franchise for you, or are you interested in other franchise opportunities in the Food and Beverage Industry? Check out our listings page on the Vetted Biz website for thousands of franchises available for your investment.
