Published on 3 Dec 2021 Time 8 min read Last update by 1 Feb 2024

Fat Shack Franchises Make More than $1 Million a Year (2024)

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Fat Shack franchise is a privately held American fast-casual restaurant chain founded in Fort Collins, Colorado in 2010. Started by Tom Armenti as a late night food option for his college Town, and soon thereafter joining hands with classmate Kevin Gabaeur, not letting go of a “whatever it takes” mentality. Fat Shack slowly expanded, opening up its first franchise in Denver in 2015. It also received increased popularity after the co-owners appeared on an episode of Shark Tank.

Fat Shack has now expanded to 28 locations in 11 states throughout the US. And remains a competitor in the fast food business.

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Armenti currently serves as the CEO and President of Fat Shack, with Gabaeur as the CFO.

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Fat Shack Franchise 

If you are considering opening up a Fat Shack franchise, here are some initial costs to keep in mind. All information listed here is from the current 2021 FDD of Fat Shack.

Fat Shack Franchise Cost

Initial Fees

Type of expenditure Amount (Low) / $ Amount (High) / $
Initial Franchise Fee and Development Fee 25,000 25,000
Lease Costs 3,000 11,000
Space Acquisition and Leasehold Improvements 20,000 105,000
Architectural Designs and Professional Fees 1,500 12,000
Furnishings and Equipment 25,000 55,000
Signs 5,000 12,500
Computer, Software and Office Equipment 750 2,000
POS System 7,000 12,000
Security Surveillance System 500 4,000
Opening Inventory and Supplies 5,000 10,000
Smallwares and Print Materials 7,500 7,500
Security Deposits, Utility Deposits, Business License 2,500 6,000
Lease Review Fees 0 750
Pre-opening Hiring and Training Employees 3,000 6,000
Opening Market 1,000 5,000
Business Insurance 1,000 2,500
Additional Funds – 3 months 5,000 15,000
Total Estimated Initial Investment 112,750 291,250

Some other important fees to note that are necessary for continuation, mainly royalty fees of 6% of gross sales and renewal fees of $6000

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Outlet Details

Outlet type Year Outlets at start of year Outlets at end of year Net change
Franchised 2018 8 9 +1
2019 9 13 +4
2020 13 18 +5
Company-owned 2018 2 2 0
2019 2 2 0
2020 2 4 +2
Total outlets 2018 10 11 +1
2019 11 15 +4
2020 15 22 +7

As you can see from the table above, over the last 3 years the company owned branches have been relatively stable. With an increase of 2 in the last 3 years. At the same time, the increase in franchised outlets has increased by 10 in the last 3 years, with the net change in 2020 being +5. This points to an increasing number of franchised outlet openings. This may point to a favorable environment for possible franchising. 

Compared to the end of 2018, with 9 franchised outlets (82% of total outlets) and 2 company owned outlets (18% of total outlets), by the end of 2020, Fat Shack had 18 franchised outlets (82% of total outlets) and 4 company owned outlets (18% of total outlets). It is interesting to note that Fat Shack has kept the exact same ratio of franchised outlets to company owned outlets as 3 years ago. It is also interesting to note that franchised outlets constitute a disproportionately large percentage of the overall number of outlets. However, fat shack has mentioned that one of its growth strategies includes opening new domestic company-owned shacks.

 

Risk Factors When Investing or Opening a Fat Shack Franchise

Some risks in growth strategies and operations for Fat Shack include:

– COVID and other pandemic outbreaks: Fat Shack, like almost all other businesses, has been affected by the COVID-19 pandemic. They fear that further factors like this outbreak may hinder staffing their outlets. And, even in extreme cases, may make it more difficult to get necessary ingredients and increase commodity costs.

– Failure to design and execute appropriate growth strategies: Since their success depends on identifying and executing successful business strategies, there is a risk that they might not be able to identify appropriate strategies successfully in the current industry environment. Or may not be able to execute them properly. 

– Failure to find suitable locations for their new shacks, or open these shacks timely or with conditions that they would prefer. Factors that might implement the timing of opening these new shacks that the company plans include: difficulty finding attractive lease terms, shortage of labor, difficulty in finding permits to start these shacks on a timely basis etc.

– Risks associated with expanding to new and unfamiliar locations: Since Fat Shack plans to expand to new markets, ones that they are not familiar with, this might present additional risks to success. With diverse consumer tastes and preference patterns being difficult to predict. Additionally, with expanding to any new location, it takes longer to reach the targeted level of sales. And can possibly be too much to bear for the company at that time.

– Incidents involving food safety and food-borne illnesses could adversely affect guests’ perception of the brand, result in lower sales and increase operating costs.

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Some special risks to consider this franchise specifically include:

– Out of state dispute resolution: After signing the franchise agreement and area development agreement, you are obligated to resolve disputes with the franchisor by arbitration and/or litigation only in Colorado. Which may force you to accept a less favorable settlement for disputes and cost more to arbitrate or litigate with the franchisor in Colorado than in your own state. 

– Spouse liability: Fat Shack requires you to sign a document that makes your spouse liable to the financial obligations of the franchise. Even though they have no ownership rights.

– Sales performance required: There are minimum sales performance requirements. Inability to maintain, which will cost territorial rights, your franchise, and investment.

Profits

Average sales of company-owned and affiliate-owned Fat Shack Units that were in operation for the entire calendar year, 2020

Number of Units in GroupAverage Unit SalesNumber and Percentage of Units that met or exceeded the average salesHighMedianLow
5$1,141,265
480.0%
$1,474,121$1,228,521$556,065

Average sales of franchisee-owned Fat Shack Units that were in operation for the entire calendar year, 2020

Number of Units in GroupAverage Unit SalesNumber and Percentage of Units that met or exceeded the average salesHighMedianLow
10$1,091,986
550.0%
$1,463,336$1,080,597$767,783

The average unit sales of franchise stores in 2020 was $1,091,986. Which is comparable to the $1,141,265 of the average unit sales of company owned stores. The high was about 35% above the average. And the low was about 30% below the average for franchise stores. 

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Past Financial Statements

FAT SHACK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDING DECEMBER 31

 20202019
Revenue  
Franchise fees$ 95,500$ 55,500
Royalties979,664578,081
Store sales523,783
Marketing fees43,30453,346
Other income70,3624,447
Total Revenues1,712,613691,374
Cost of Store Sales174,937
 1,537,676691,374
Operating Expenses1,080,457487,119
Operating Income457,219204,255
Interest Income17,7458,488
Net Income Before Income Tax474,964212,743
Income Tax(106,468)(40,179)
Net Income$368,496$172,564

Looking at the growth of revenue, it looks promising, with approximately a 148% increase in total revenues. The franchise fees and royalty fees collected by the company went up. Implying the opening and greater success of the franchises. At the same time, operating expenses increased significantly as well, going up by 122%.

Overall, both the operating income and net income increased by more than 100%. Keeping in mind that this was during the initial rise of COVID-19. When the competency of various food business was decreasing. And the costs of the business were increasing substantially, the growth that Fat Shack saw was impressive.

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FAT SHACK INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS

YEARS ENDING DECEMBER 31

 20202019
Cash Flows from Operating Activities:  
Net income$368,496$172,564
Depreciation9,6321,871
Adjustments to reconcile net Income to net cash provided by operating activities:  
Changes in assets and liabilities  
Accounts receivable(21,595)(9,729)
Prepaid expenses1,545
Due from franchisees2,500
Security deposits(6,000)
Notes receivable(140,464)(157,139)
Due from related parties183(333)
Inventory(12,374)
Accounts payable and accrued expenses13,370726
Due to related parties(18,496)
Income taxes payable32,88438,979
Sales tax payable6,212
Deferred taxes(1,200)1200
Rebates payable59,791
Deferred revenue52,50032,50
 369,93557,688
Cash Flows from Financing Activities  
Notes payable250,000
Dividends paid(160,000)(37,895)
Member draws(29,591)
 (160,000)182,514
Cash Flows from Investing Activities  
Fixed asset acquisition(66,537)
 (66,537)
Net Increase in Cash143,398240,202
Cash – Beginning357,530117,328
Cash – Ending$500,928$357,530
Supplemental Disclosure of Noncash Investing and Financing Activities  
Distribution of notes receivable to members’ 190,972
Note payable converted to equity stock 250,000
Members’ capital converted to equity stock 30,000

Fat Shack
The cash flows from operating expenses increased tremendously from 2019 to 2020 by about 541%. Attributing to deferred revenues, notes receivable and rebates payable among other things. Cash flows from financing activities showed that the company was less focused on raising capital and focusing more on distributing dividends to shareholders. Implying they had a successful year. Cash flows from investing activities show that the company focused on fixed asset acquisitions in 2020 as well. Although the net increase in cash was lower, because a significant portion of it was fixed asset acquisitions, it may point to favorable expansion in the future. 

Conclusion

Overall, Fat Shack seems to be expanding well. And franchised stores seem to be running, increasing the number of franchise stores as well as having a good amount of average sales for these stores. In the midst of COVID, increasing the business’s expenses, it seems promising that this growing business has seen increases in profit and in cash. All the while distributing dividends and acquiring fixed assets. Although relatively new in the food industry, this level of success at an early stage points to favorable profits in the future, and success of future franchises. 

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