Subway Franchise Profitability & Requirements (2022)
Written by: Collins Kibet
This article is based on its most recent FDD. Keep reading or watch the video originally recorded on Vetted Biz Youtube Channel
In 1965, a college freshman named Fred Deluca received an initial investment of $1,000 from Dr. Peter Buck, a nuclear physicist, to open a submarine sandwich shop to help pay his tuition. And what started as a small sandwich restaurant called Pete’s Subway in Bridgeport, Connecticut is currently the world’s largest submarine sandwich chain. Today, there are more than 40,000 locations of the Subway Franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business… around the world serving fresh, affordable, made-to-order sandwiches. In this article, you will find an analysis of Subway Franchise profitability and the requirements you will need to open a franchise.
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Story of Subway Franchise
By 1974, the duo owned and operated 16 submarine sandwich shops across Connecticut and started franchising that year, after realizing they would not reach their 32 store goal in time.
The current Chief Executive Officer of Subway Restaurants is John W. Chidsey and has served in the role since 2019.
Interested in learning more about the Subway franchising system? Continue reading and check out our Vetted Biz and Visa Franchise websites for much more information on franchising.
Estimated Initial Investment The amount of funds necessary to begin operations of a business or franchise including the first three months of operation..Your Estimated Initial Investment Franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business…
Agreement (Part 01)
| Type of expediture | Lower Amount | Mid Amount | Higher Amount | Method of payment | When due | To whom payment is to be made |
|---|---|---|---|---|---|---|
| Initial Franchise Fee Is a fee that franchisees pay to franchisors when signing an agreement, for establishing a franchise relationship, and getting some initial services. It is… | $15,000 | $15,000 | $15,000 | Lump sum | When you sign Franchise Agreement | Us |
| Real Property | $2,000 | $5,000 | $12,000 | Lump sum | When you sign Intent to Sublease of Sublicense, or direct lease | Landlord or Licensor See note 2 |
| Leasehold Improvements | $75,000 | $150,000 | $200,000 | As incurred | Pro rata during construction | Vendor |
| Leasehold Improvements For a non-traditional location | *40,900 | *44,750 | *77,000 | As incurred | Pro rata during construction | Vendor |
| Equipment, Futniture and Decor | $75,000 | $112,500 | $150,000 | Lump sum | When you place order | Vendor |
| Optional Security System (not including monitoring) | $2,450 | $2,850 | $3,550 | Lump sum | When you place order | Vendor |
| Freight Charges (varies by location) | $8,000 | $10,400 | $14,000 | Lump sum | Prepaid when you order or on delivery | Carrier or us |
| Freight Charges (varies by location) For a non-traditional location | *3,000 | *3,800 | *4,000 | Lump sum | Prepaid when you order or on delivery | Carrier or us |
Estimated Initial Investment. Your Estimated Initial Investment Franchise Agreement (Part 02)
| Type of expediture | Lower Amount | Mid Amount | Higher Amount | Method of payment | When due | To whom payment is to be made |
|---|---|---|---|---|---|---|
| Outside Signage | $2,000 | $4,000 | $8,000 | Lump Sum | Whithin 1 week of opening | Vendor |
| Outside Signage For a non-traditional location | $1,600 | $4,000 | $8,000 | Lump Sum | When you place order | Vendor |
| Opening Inventory Opening inventory = Ending inventory + COGS – purchase or additional units Opening inventory, also known as beginning inventory: is the merchandise or materials… | $4,400 | $5,225 | $6,050 | Lump Sum | Whithin 1 week of opening | Vendor |
| Insurance | $1,200 | $2,000 | $5,000 | As incurred | Before we will order equipment | Vendor |
| Supplies | $500 | $900 | $1,300 | As incurred | Before Opening | Vendor |
| Training expenses (including travel & lodging) | $2,500 | $3,500 | $4,500 | As incurred | During training | Hotel, etc. |
| Legal and Accounting | $1,000 | $2,000 | $4,000 | Lump Sum | Before Opening | Vendor |
| Grand Opening Advertising | $2,000 | $3,250 | $4,000 | Lump Sum | Around initial opening or after relocation, remodel, and/or transfer to a new franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business… | Vendor |
| Miscellaneous Expenses (business licenses, utility deposits, & small equipment) | $4,000 | $6,000 | $8,000 | As incurred | As required | Vendor |
| Additional Funds AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings Known as AFN or additional funds needed… – three onths | $12,000 | $26,000 | $42,000 | As incurred | As required | Note 8 |
| TOTAL | $207,050 | $348,125 | $476,900 | |||
| TOTAL For a non-traditional location | $167,500 | $236,275 | $343,900 | |||
Subway Franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business… Requirements
- The minimum net worth Value of all the non-financial and financial assets of a business buyer. There is usually a minimum net worth requirement to qualify as a… of $80,000
- At least $30,000 in liquid cash.
Subway Franchise On-going fees
Royalty: 8% of total gross sales The total amount in dollars made in the business before expenses are deducted. See also Gross Revenue.
Advertising: 4.5% of total gross sales.
Additional funds AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings Known as AFN or additional funds needed… and local advertising fees are established The year a Business for Sale was established. If the business has been running for a minimum of ten years, Vetted Biz will qualify… by the franchisee.
What about Subway franchise profitability?
Based on the median multiple of 0.31 and net sales The total amount in dollars made in the business before expenses are deducted. See also Gross Revenue. averaging $397,600 between 2019 and 2020, a Subway Franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business… would sell for $123,256. The resale value is less than the midpoint investment of $341,975 by over $200,000 which indicates a very low resale value.
However, since the median multiple of net sales averaging over $5 million is high at 0.86, owning multiple Subway franchises increases your earning potential from a resale. For example, if you own 15 Subway franchises, the average net sales would be about $5,964,000. With the median multiple of 0.86, the resale value of the 15-franchise system would be approximately $5,129,040.
So, comparing the resale value to the initial midpoint investment of $5,129,625 for the 15 franchises, we see that Subway makes a small net loss of $585. And, as a result, in order to make money from a resale, one has to one over 15 Subway franchises.
Doctor’s Associates LLC. Statements of Income. Years Ended December 31, 2020, 2019 and 2018
| (dollars in thousands) | 2020 | 2019 | 2018 |
|---|---|---|---|
| Franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business… revenues | |||
| Franchise royalties Fees paid by a franchisee to their franchisor in order to operate a franchise location. They are usually on a weekly or monthly basis. | $634,329 | $834,117 | $857,341 |
| Franchise fees | 5,876 | 4,353 | 1,723 |
| Total franchise revenues | 640,205 | 838,470 | 859,064 |
| Other revenues | 48,882 | 120,422 | 68,298 |
| Total revenues | 689,087 | 958,892 | 927,362 |
| Expenses | |||
| License fees | 263,117,117 | 438,873 | 470,519 |
| Service fees | 122,914 | 117,482 | 99,924 |
| Other operating expenses An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX, operating expenses include rent, equipment, inventory… | 291,736 | 396,067 | 347,545 |
| Total expenses | 677,767 | 396,067 | 917,988 |
| Income Income, also known as earnings or profits, is money that a person or a business receives in return for working, providing a product or… from operations | 11,320 | 6,470 | 9,374 |
| Other income | 1,115, | 1,030 | 1,115 |
| Income before provision for income taxes | 12,435 | 7,500 | 10,489 |
| Provision for income taxes | 4,935 | – | 793 |
| Net income | $7,500 | $7,500 | $9,696 |
Income Statement Key Insights
Doctor’s Assosiaties LLC is the franchisor of all Subway franchises. In the last three years, the company was profitable When the earnings in a given period of time is more than the expenses in a business. with an average net income Income, also known as earnings or profits, is money that a person or a business receives in return for working, providing a product or… of $ 8,232,000. The net income decreased by 22% from 2018 compared to 2019 and 2020.
Doctor’s Associates LLC. Statements of Cash Flows. Years Ended December 31, 2020, 2019 and 2018
| (dollars in thousands) | 2020 | 2019 | 2018 |
|---|---|---|---|
| Cash flows from operating activities Operating activities are the core activities of a business. These activities are related to providing goods and/or services to the market of their industry…. | |||
| Net income Income, also known as earnings or profits, is money that a person or a business receives in return for working, providing a product or… | $7,500 | $7,500 | $9,696 |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||
| Depreciation A reduction in the value of an asset over time, due to wear and tear. | 168 | 204 | 477 |
| Amortization The term “amortization” refers to: • In accounting, Amortization is very similar to depreciation, it’s a decrease in the value of an intangible asset, which… of intangibles | 485 | – | – |
| Gain on sale of assets | – | (215) | (31) |
| Gain on sale of investment | – | – | (516) |
| Contract settlement loss | 606 | – | – |
| Provision for (recovery of) doubtful accounts | 3,760 | (1,741) | (5,946) |
| Changes in assets and liabilities: | |||
| Accounts and notes receivable | (13,417) | (2,560) | 1,260 |
| Other receivables | 17,501 | (28,304) | (4,402) |
| Due from/to affiliates | 80,361 | 20,439 | (59,054) |
| Prepaid expenses and other current assets | (196) | 8,716 | (5,946) |
| Deferred contract costs | 1,210 | 1,596 | 257 |
| Accounts payable and accrued expenses, advances from franchisees, and other liabilities | (15,923) | (3,167) | 33,613 |
| Deferred revenues | 62,222 | (3,592) | (1,009) |
| Net cash provided by (used in) operating activities | 146,597 | (3,099) | (31,476) |
| Cash flows from investing activities | |||
| Purchase of property and equipment | (181) | (95) | (262) |
| Purchase of intangibles | (9,338) | – | – |
| Proceeds from sale of equipment | 38 | 524 | 185 |
| Investment in affiliate It might mean: 1-An affiliate-own business: Is a type of business where the main company owns less than 50+% of the other companies. It’s… | – | – | 516 |
| Net cash (used in) provided by investing activities | (9,481) | 429 | 439 |
| Cash flows from financing activities | |||
| Shareholder A shareholder or stakeholder is a person, company, or institution that owns at least one share of a company’s stock. Because shareholders essentially own… distributions | – | – | (25,000) |
| Member contributions | 44,680 | 3,788 | – |
| Net cash provided by (used in) financing activities | 44,680 | 3,788 | (25,000) |
| Net increase (decrease) in cash and cash equivalents | 181,796 | 1,118 | (56,037) |
| Cash and cash equivalents | |||
| Beginning | 8,613 | 7,495 | 63,532 |
| Ending | $190,409 | $8,613 | $7,495 |
| Supplemental disclosures of cash flow The net profit before taxes plus payments to the owner(s), interest, and depreciation of assets. information | $- | $- | $2,777 |
Analysis:
Compared to 2019 and 2018, the company had a huge amount of cash and cash equivalents left at the end of 2020 to the tune of over $190 million. And this amount was only $8.6 million in 2019 and $7.4 million in 2018. Above all, the availability of cash at the end of the year indicates that the company has healthy financials as they are able to manage their cash flows from operations, investments, and financial activities.
How many Subway units have opened and closed?
System-wide Outlet Summary for years 2018 to 2020
| Outlet type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
|---|---|---|---|---|
| U.S. Franchised | 2018 | 25,906 | 24,798 | -1,108 |
| 2019 | 24,798 | 23,802 | -996 | |
| 2020 | 23,802 | 22,201 | -1,601 | |
| U.S. Company-Owned | 2018 | 0 | 0 | 0 |
| 2019 | 0 | 0 | 0 | |
| 2020 | 0 | 0 | 0 | |
| U.S. Total Outlets | 2018 | 25,906 | 24,798 | -1,108 |
| 2019 | 24,798 | 23,802 | -996 | |
| 2020 | 23,802 | 22,201 | -1,601 |
However, over the last three years, the number of franchised outlets has been decreasing at a rate of about 1200 units per year. In total, 3705 franchises have closed in 2018, 2019, and 2020. So, this is an indication that these stores may not be doing well, especially during the pandemic when over 1,600 locations closed down.
Is it worth investing in a Subway franchise?
Many Subway franchised outlets have closed down over the last three years. And his is an indication that the franchisees were not performing well especially during the pandemic when there was a net loss of 1,600 locations. In addition, it takes a relatively long time to recoup your initial investment The amount of funds necessary to begin operations of a business or franchise including the first three months of operation. with profit margins of less than 20%. Based on the data from 2020, it could take you up to 12 years to recoup your initial Subway franchise A franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business… investment.
In conclusion, according with the franchisor, the company is profitable When the earnings in a given period of time is more than the expenses in a business. as it has recorded net incomes in the last three years. But, we recommend speaking to at least 5 franchisees to fully understand their business model before deciding to buy a franchise. Also, you can check out other franchising opportunities in the Food Industry A particular form or branch of economic or commercial activity. Subindustries are often referred to as categories on Vettedbiz.com on our website for more insights.
