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 approximately 37,000 locations of the Subway Franchise 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.
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. Since then, they expanded quickly with its longtime slogan, “Eat Fresh.” According to its website, Subway currently operates 36,826 stores around the world across 100 countries and territories, of which 56% operate in the U.S. As of December 31, 2021, the company has sold 38,878 franchises in the U.S., of which 21,147 are open and 104 are in development.
The current Chief Executive Officer of Subway Restaurants is John W. Chidsey who has served in the role since 2019.
Subway is looking for candidates who are passionate about the industry and possess an entrepreneurial spirit committing to building a successful business. After you fill out an application form, you will be reached out by a business development agent who will provide you with the Franchise Disclosure Document and conduct research with you. After getting your application approved, you are able to select the desired location and purchase your franchise. You can get your restaurant ready and start the business after 2-week in-depth training provided by the franchisor!
The initial investment necessary to begin the operation of a Subway franchise ranges from $222,050 to $506,900 ($182,550 to $373,900 for a non-traditional location). This sum includes an estimated $22,370 to $44,830 that must be paid to Subway’s affiliate.
The franchisees should pay an initial franchise fee of $15,000 for each store. If you are an existing franchisee looking for expansion, the initial franchise fee is reduced to $7,500. If you serve in the U.S. Armed Force, your initial franchise fee would also be $7,500. In addition to franchise fees, you are expected to invest in assets and capital. The location fees, deposits, and rent are expected to be $2,050 to $14,500, and $90,000 to $180,000 are expected to go to equipment purchasing.
Once the store’s operations begin, franchisees are expected to pay the company a royalty fee of 8% on gross sales and a marketing fee of 4.5% in exchange for the marketing services provided by the franchisor. The average industry royalty fee is 5.3% and the average industry marketing services fee is 2.3%. Subway franchises have higher percentages for both required payments.
Subway does not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. However, if you are purchasing an existing Subway franchise, the company may provide you with the actual records of that franchise.
Through our analysis of the franchisor income statement, we can estimate sales figures from the income statement line item “Franchise Revenue.” Ideally, the line item is Royalty Revenue. Franchise revenue can include franchise fees received.
In 2021, Subway saw a 21.3% increase in revenue, growing from $634 million in 2020 to $769 million in 2021.
2021 Subway Sales and Breakeven point:
Royalty fee: 8% of annual commissionable sales
Royalty revenues: $769,544,000
Estimated system-wide franchise sales: $9,619,300,000
Estimated average franchise revenue: $454,877
|Initial Investment (midpoint)||%Profit margin of average franchise sales||Estimated profits||Time to recoup investment|
Based on the average sales calculated above, at an average of a 15% profit margin, it will take approximately 7.3 years to recoup your investment, which is longer than most franchise opportunities. I scaled up two years to reflect the time of training and preparation for opening. Usually, the time to recoup investments incorporates roughly a 2-year period to scale up the franchise, including finding the location, building the restaurant, passing break even, and then reaching significant income.
To assign a valuation multiple for Subway 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 Subway franchise as well as its selling price multiples.
Under $1 Million Net Sales
Estimated Selling Price = Net Sales * 0.31
$1 Million – $5 Million Net Sales
Estimated Selling Price = Net Sales * 0.34
Over $5 Million Net Sales
Estimated Selling Price = Net Sales * 0.86
Based on the median multiple of 0.31 and net sales averaging $454,877 in 2021, a Subway Franchise would sell for $141,011. The resale value is less than the midpoint investment of $364,475 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 $6,823,155. With the median multiple of 0.86, the resale value of the 15-franchise system would be approximately $5,867,913.
So, comparing the resale value to the initial midpoint investment of $5,467,125 for the 15 franchises, we see that when you sell your Subway restaurant portfolio you could expect a $500,000 gain on your initial investment. Pretty modest for all the work required to open 15 restaurants!
When you purchase a Subway franchise for sale, you are buying into a well-known brand that has established trust with consumers. Additionally, you are buying support from the franchisor as well.
However, the resale prices listed online are significantly lower than the initial investment. We reviewed several listings for Subway Franchises for sale on the BizQuest. In Florida, the highest resale price for a Subway franchise is $265,000, located at Oakland Park. This is a successful Subway with a long-standing loyal customer base. The lowest resale price is $50,000 for multiple Subway locations. Most of them were selling due to downsizing or relocation. In Massachusetts, the average resale price is approximately $126,000. As a result, the resale price is significantly lower than the initial investment, closing to our estimate above. However, most of them are sold not because of low profit but mostly due to the change in personal career goals.
Although Subway is franchising across the nation and the world, its stability is questionable. There was a 1,043 net decrease in the number of Subway franchises in 2021. It has been decreasing consecutively since 2019, especially during the COVID-19 pandemic, where some stores were forced to close due to decreasing customer demands and government restrictions.
|Outlet Type||Year||Outlets at the Start of the Year||Outlets at the End of the Year||Net Change|
|U.S. Total Outlets||2019||24,798||23,799||-999|
In 2021, there were 550 new openings, 3 terminations, 4 non-renewals, 69 reacquired by franchisor, and 1,505 ceased operations. Failure rate represents franchise unit terminations, non-renewals, and franchises that ceased operations for other reasons in a given year relative to the total number of franchise units. The failure rate for the Subway franchise in 2021 was nearly 10% and over the past 3 years, 20%+.
|State||Year||Outlets at Start of Year||Outlets Opened||Terminations||Non-Renewals||Reacquired By Franchisor||Ceased Operations – Other Reasons||Outlets at the End of the Year|
Doctor’s Associates LLC is the franchisor of all Subway franchises. In the last three years, the company was profitable with an average net income of $19,364,000. The net income increased by 474% from 2021 compared to 2019 and 2020!
In 2021, the revenues increased dramatically as soon as the world started to recover from the COVID-19 pandemic. With increasing revenues, the expenses grew at a much slower rate, contributing to a higher net income.
|(dollars in thousands)||2021||2020||2019|
|Total franchise revenues||776,555||640,205||838,470|
|Other operating expenses||290,771||291,736||396,067|
|Income from operations||32,855||11,320||6,470|
|Income before provision for income taxes||33,561||12,435||7,500|
|(Benefit from) provision for income taxes||(9,531)||4,935||–|
Liquidity is one of the most important measurements of a company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, operations, and expansion of franchised locations. According to the cash flows statement, Subway had a $27,048 thousand decrease in cash and cash equivalents in 2021. A large amount of cash was used in the purchase of intangible assets. At the end of the fiscal year, its total cash and cash equivalents amounted to approximately $163,361 thousand.
|(dollars in thousands)||2021||2020||2019|
|Cash flows from operating activities|
|Adjustments to reconcile net income to net cash provided by (used in) operating activities:|
|Amortization of intangibles||6,202||485||–|
|Loss (Gain) on sale of assets||46||–||(215)|
|Contract settlement loss||–||606||–|
|Provision for (recovery of) doubtful accounts||(500)||3,760||(1,741)|
|Changes in assets and liabilities:|
|Accounts and notes receivable||14,763||(13,417)||(2,560)|
|Due from/to parent||–||2,320||(1,775)|
|Due from/to affiliates||(17,279)||80,361||20,439|
|Prepaid expenses and other current assets||(518)||(196)||8,716|
|Deferred contract costs||1,775||1,210||1,596|
|Accounts payable and accrued expenses, advances from franchisees, and other liabilities||(29,699)||(15,923)||(3,167)|
|Net cash provided by (used in) operating activities||18,533||146,597||(3,099)|
|Cash flows from investing activities|
|Purchase of property and equipment||(120)||(181)||(95)|
|Purchase of intangibles||(45,711)||(9,338)||–|
|Proceeds from sale of equipment||250||38||524|
|Investment in affiliate||–||–||–|
|Net cash (used in) provided by investing activities||(45,581)||(9,481)||429|
|Cash flows from financing activities|
|Net cash provided by (used in) financing activities||–||44,680||3,788|
|Net increase (decrease) in cash and cash equivalents||(27,048)||181,796||1,118|
|Cash and cash equivalents|
|Supplemental disclosures of cash flow information||$7,826||$-||$-|
Subway used to be the biggest restaurant chain in the U.S. and for a while, it had the most locations of any restaurant worldwide. Things have turned when multiple franchisees complain about sticking with the Subway business model and want to get out. John Oliver analyzed the Subway franchise critically. However, does he go too far when talking about Subway?
As mentioned above, it is relatively easy to open a Subway franchise and the start-up cost is significantly lower than its competitors, compared with McDonald’s which costs $1.3 million and nearly $2.5 million. This explains why Subway franchisees are primarily individuals and families, unlike McDonald’s, many of them are opened by investment firms. It is proven through the online resale listings.
Low franchise cost comes with some significant catches. Subway franchises bring in a lot less money, which is an average of $434,000 indicated by John Oliver. On the other hand, the average sales of Jimmy John’s and McDonald’s are $866,000 and $3,389,000, respectively. In addition to less revenue, Subway’s franchisees need to pay a lot more back to their parent company, paying 12.5% of their gross sales. While 4.5% of gross sales are put into market advertising where Subway does a good job, the royalty fee is one of the highest in the industry. As this is true, with a failure rate lower than the average of 7%, there are many Subway franchisees that have done well over the years.
John Oliver also mentioned that franchisees should follow their company’s decision, which may hurt their own businesses – tight margins have been exacerbated by Subway’s continuous expansion, allowing locations to open near each other and cannibalizing their businesses. This is indicated as “not receiving exclusive territory” on the FDD. However, most companies do not guarantee exclusive territory and most franchisees have to compete against each other.
Investing in a Subway Franchise can be an interesting opportunity, as it is one of the famous worldwide restaurant chains. Although there are over a thousand franchises failed to operate each year since 2019, the failure rate is still below the industry average. In addition, it takes a relatively long time to recoup your initial investment. Based on the data in 2021, it could take you up to 7.3 years to recoup your initial Subway franchise investment.
In conclusion, according to the franchisor, the company is profitable as it has recorded net incomes in the last three years. However, you need to make sure you are determined in joining the business, as the current resale price of the business is significantly lower than the initial investment.
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