Fat Shack Franchises Make More than $1 Million a Year (2024)
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.
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.
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.
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 Group | Average Unit Sales | Number and Percentage of Units that met or exceeded the average sales | High | Median | Low | ||
|---|---|---|---|---|---|---|---|
| 5 | $1,141,265 |
|
$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 Group | Average Unit Sales | Number and Percentage of Units that met or exceeded the average sales | High | Median | Low | ||
|---|---|---|---|---|---|---|---|
| 10 | $1,091,986 |
|
$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.
Past Financial Statements
FAT SHACK INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDING DECEMBER 31
| 2020 | 2019 | |
|---|---|---|
| Revenue | ||
| Franchise fees | $ 95,500 | $ 55,500 |
| Royalties | 979,664 | 578,081 |
| Store sales | 523,783 | – |
| Marketing fees | 43,304 | 53,346 |
| Other income | 70,362 | 4,447 |
| Total Revenues | 1,712,613 | 691,374 |
| Cost of Store Sales | 174,937 | – |
| 1,537,676 | 691,374 | |
| Operating Expenses | 1,080,457 | 487,119 |
| Operating Income | 457,219 | 204,255 |
| Interest Income | 17,745 | 8,488 |
| Net Income Before Income Tax | 474,964 | 212,743 |
| 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.
FAT SHACK INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
STATEMENTS OF CASH FLOWS
YEARS ENDING DECEMBER 31
| 2020 | 2019 | |
|---|---|---|
| Cash Flows from Operating Activities: | ||
| Net income | $368,496 | $172,564 |
| Depreciation | 9,632 | 1,871 |
| Adjustments to reconcile net Income to net cash provided by operating activities: | ||
| Changes in assets and liabilities | ||
| Accounts receivable | (21,595) | (9,729) |
| Prepaid expenses | – | 1,545 |
| Due from franchisees | 2,500 | – |
| Security deposits | – | (6,000) |
| Notes receivable | (140,464) | (157,139) |
| Due from related parties | 183 | (333) |
| Inventory | (12,374) | – |
| Accounts payable and accrued expenses | 13,370 | 726 |
| Due to related parties | – | (18,496) |
| Income taxes payable | 32,884 | 38,979 |
| Sales tax payable | 6,212 | – |
| Deferred taxes | (1,200) | 1200 |
| Rebates payable | 59,791 | – |
| Deferred revenue | 52,500 | 32,50 |
| 369,935 | 57,688 | |
| Cash Flows from Financing Activities | ||
| Notes payable | – | 250,000 |
| 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 Cash | 143,398 | 240,202 |
| Cash – Beginning | 357,530 | 117,328 |
| 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 |
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.
