Is First Watch a Franchise? Can You Buy One in 2024?
This article is based on the video featured above, originally recorded for Vetted Biz Youtube Channel.
First Watch franchise is a breakfast and lunch restaurant franchise serving made-to-order breakfast, brunch and lunch using fresh ingredients. So, First Watch offers traditional favorites, such as omelets, pancakes, sandwiches and salads, and unique specialty items like quinoa power bowls, and avocado toast. Also sells alcoholic beverages.
First Watch, Inc., opened the original First Watch Restaurant in Pacific Grove, California in 1983. First Watch, Inc. was dissolved on April 18, 2008. Then on April 30, 2008, First Watch Restaurants began to offer franchises. So, at the end of 2020, there were 88 franchised locations and 321 company-owned locations across 29 states in the United States.
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Christopher A. Tomasso is the Chief Executive Officer and President and has been the Chief Executive Officer since June 2018 and the President since November 2015. The First Watch restaurant concept is majority-owned by Advent International, one of the world’s largest private-equity firms. Additionally, in 2018 it was voted as one of the “Best Places to Work” by Business Intelligence Group.
How Much Is a First Watch Restaurant Franchise?
First Watch Restaurant Franchise Fee
$40,000
The initial license fee for a First Watch franchise is $40,000. In other words, this is the upfront fee that must be paid when opening a First Watch franchise.
During the fiscal year 2020, to address certain business situations, First Watch charged a lower initial franchise fee ranging from $15,000 to $35,000.
First Watch Franchise Cost
The estimated total investment necessary to begin the operation of a First Watch restaurant ranges from $899,800 to $1,522,000.
Additional Cost Breakdown
The following costs are part of the upfront costs included in the initial investment. And many of these are one-time fees that are needed to launch the franchise.
Additional Cost Breakdown
| Leasehold Improvements | $475,000 – $680,000 |
| Leasehold Expense | $0 – $30,000 |
| Furniture, Fixtures and Equipment | $230,000 – $325,000 |
| Initial Inventory | $7,000 – $10,000 |
| Small Wares | $30,000 – $35,000 |
| Point of Sale Computer Hardware & Software | $30,000 – $35,000 |
| Travel and Living Expenses During Training | $1,000 – $20,000 |
| Initial Training Fee | $0 – $15,000 |
| Opening Crew Costs | $5,000 – $25,000 |
| Business Permits | $7,000 – $12,000 |
| Insurance Deposits and Premiums (for first year) | $2,000 – $10,000 |
| Architect Fees | $20,000 – $25,000 |
| Utility Deposits | $0 – $5,000 |
| Grand Opening Advertising and Promotion | $5,000 – $35,000 |
| Liquor Licensing | $2,800 – $80,000 |
| Signage and Graphics | $15,000 – $40,000 |
| Additional Funds (3 months) | $30,000 – $100,000 |
| Total | $899,800 – $1,522,000 |
Ongoing Costs and Fees
Royalty Fee: 4% of Gross Sales once a month
System Fund Contributions: Maximum – 3% of Gross Sales monthly; currently 1.5% of Gross Sales monthly.
How Much Do Franchise Owners Make?
First Watch Franchise Sales Figures
First Watch does not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or affiliate-owned or franchised outlets. The company also does not authorize employees or representatives to make any such representations either orally or in writing. If you are purchasing an existing outlet, however, First Watch may provide you with the actual records of that outlet.
However, let’s look at the performance of their corporate locations.
Performance
In 2020, Total restaurant sales were $337 million on 321 company-owned stores. And taking the 2019 year end company store count of 299 (as the new restaurants were in ramp-up mode), we can guestimate average sales of a First Watch restaurant of $1.12M. Assuming a profit margin of 10%, it is expected that the average First Watch restaurant made $112,000 in profit in 2020.
In 2019, Total restaurant sales were $429 million on 299 company-owned stores. So, taking the 2018 year end company store count of 240 (as the new restaurants were in ramp-up mode), we can guestimate average sales of a First Watch restaurant of $1.78M. Assuming a profit margin of 15%, it is also expected that the average First Watch restaurant made $268,000 in profit in 2019.
Based on a midpoint investment of $1.3M on $250k of profit and time to scale up, it is expected to take 5-6+ years to recoup your initial capital investment in a First Watch restaurant.
This is just an estimated sales based on the franchisor’s income statement and can vary greatly depending on the length that the particular franchise location has been open.
First Watch Franchisor Income Statement
First Watch Restaurant Consolidated Statements of Operations and Comprehensive Loss (In Thousands)
| FY 2020 | FY 2019 | |
|---|---|---|
| Revenues: | ||
| Restaurant sales | $ 337,433 | $ 429,300 |
| Franchise revenues | $ 4,955 | $ 7,064 |
| Total revenues | $ 342,388 | $ 436,373 |
| Operating costs and expenses: | ||
| Restaurant operating expenses (exclusive of depreciation and amortization shown below): | ||
| Cost of sales | $ 76,975 | $ 100,689 |
| Labor and other related expenses | $ 120,380 | $ 148,537 |
| Other restaurant operating expenses | $ 63,776 | $ 59,402 |
| Occupancy expenses | $ 51,375 | $ 46,151 |
| General and administrative expenses | $ 46,322 | $ 55,818 |
| Depreciation and amortization | $ 30,725 | $ 28,027 |
| Impairments and loss on disposal of assets | $ 315 | $ 33,596 |
| Transaction (income) expenses, net | $ (258) | $ 1,709 |
| Total operating costs and expenses | $ 389,610 | $ 473,929 |
| Loss from operations | $ (47,222) | $ (37,556) |
| Interest expense | $ (22,815) | $ (20,080) |
| Other income (expense), net | $ 483 | $ (255) |
| Loss before income tax benefit | $ (69,554) | $ (57,891) |
| Income tax benefit | $ 19,873 | $ 12,419 |
| Net loss and total comprehensive loss | $ (49,681) | $ (45,472) |
| Less: Net loss attributable to non-controlling interest | – | $ (33) |
| Net loss and comprehensive loss attributable to First Watch Restaurant Group, Inc. | $ (49,681) | $ (45,439) |
| Net loss per common share attributable to Fist Watch Restaurant Group, In. – basic and diluted | $ (13.07) | $ (11.95) |
| Weighted average number of common shares outstanding – basic and diluted | $ 3,802,481 | $ 3,802,481 |
First Watch Income Statement Key Insights
Overall, First Watch is not a profitable business, with a net loss of $49.6 million in 2020. First Watch also saw a revenue decrease of 21% in 2020 with revenues of $337 million. Franchise Revenues also saw a decline of nearly 30% in 2020 to $4.95 million compared to $7 million the year prior.
The biggest expense on the income statement for First Watch Restaurant Group is labor and other related expenses accounting for $120 million. 
First Watch Franchisor Cash Flow Statement
First Watch Restaurant Consolidated Statements of Cash Flows (In Thousands)
| FY 2020 | FY 2019 | |
|---|---|---|
| Cash flows from operating activities: | ||
| Net loss | $ (49,681) | $ (45,472) |
| Adjustment o reconcile net loss to net cash (used in) proved by operating actives: | ||
| Depreciation and amortization | $ 30,725 | $ 28,027 |
| Deferred income taxes | $ (19,991) | $ (12,558) |
| Non-cash operating lease costs | $ 11,727 | $ 10,772 |
| Amortization of debt discount and deferred issuance costs | $ 1,282 | $ 1,128 |
| Impairments and loss on disposal of assets | $ 315 | $ 33,596 |
| Stock-based compensation | $ 750 | $ 1,160 |
| Settlement gains from acquisitions | – | $ (160) |
| Changes in assets and liabilities, net of acquisitions: | ||
| Accounts receivable | $ 1,826 | $ (3,192) |
| Inventory | $ (203) | $ (439) |
| Prepaid expenses | $ 619 | $ (439) |
| Deferred offering costs | $ 1,307 | – |
| Other assets, current and tong term | $ (446) | $ (1,094) |
| Accounts payable | $ (886) | $ (740) |
| Accrued liabilities | $ (3,670) | $ 5,566 |
| Accrued compensation and deferred payroll taxes, current and long-term | $ 2,929 | $ 643 |
| Deferred revenues, current and long term | $ (3,060) | $ 2,024 |
| Operating lease liabilities | $ 8,073 | $ 3,101 |
| Other liabilities | – | $ (458) |
| Net cash (used in) provided by operating activities | $ (18,364) | $ 21,465 |
| Cash flows from investing activities: | ||
| Capital expenditures | $ (26,974) | $ (59,169) |
| Purchase of intangible assets | $ (225) | – |
| Acquisitions net of cash acquired | – | $ (22,770) |
| Acquisition of non-controlling interest | – | $ (450) |
| Net cash used in investing activities | $ (26,974) | $ (82,389) |
| Cash flows from financing activities: | ||
| Proceeds from preferred stock issuance | $ 40,000 | – |
| Proceeds from issuance of long-term debt | $ 54,600 | $ 50,000 |
| Repayments of long-term debt | $ (3,947) | $ (2,099) |
| Proceeds from borrowings on revolving credit facility | $ 22,000 | $ 42,000 |
| Repayments from borrowings on revolving credit facility | $ (39,000) | $ (32,500) |
| Payment of debt issuance costs | – | $ (915) |
| Finance lease payments | $ (339) | $ (500) |
| Contingent consideration payment | – | $ (225) |
| Net cash provided by financing activities | $ 73,314 | $ 55,761 |
| Net increase (decrease) in cash and cash equivalents and restricted cash | $ 27,976 | $ (5,163) |
| Cash and cash equivalents and restricted cash: | ||
| Beginning of year | $ 11,121 | $ 16,284 |
| End of year | $ 39,097 | $ 11,121 |
First Watch Cash Flow Statement Key Insights
In 2020, First Watch had a net income of ($49.6) million, but their cash, cash equivalents and restricted cash were $39 million at the end of 2020 an almost 40% increase from the cash they started with at the end of the year. And this extra cash flow can also be seen from their financing activities as First Watch received $40 million in proceeds from preferred stock issuance.
How Many First Watch Units Have Opened and Closed?
First Watch’s competitors include Broken Egg Cafe, IHOP, and Waffle House.
As seen in the table above both First Watch franchise locations and company-operated locations have increased over the past two years. Therefore, in 2020 there was an increase of 22 company-operated restaurants and 19 franchise locations. So, these numbers indicate the business overall is expanding.
Conclusion
While First Watch Restaurants did see losses of almost $50 million in 2020, the company also had to react and adjust to the limited demand caused by COVID-19 for three quarters of 2020. Franchise locations during this time did grow by 19 in 2020. And First Watch has the potential for a promising future as the company recently filed for an Initial Public Offering (IPO) which would raise large amounts of additional capital to expand and increase their market share in the daytime restaurant industry. Read more on the news of the company’s potential IPO.
First Watch is already in a well-established market. The restaurant business is highly competitive, and competition among businesses serving food is rapidly increasing.
We strongly recommend you speak to at least 5 First Watch franchisees to better understand the financials (see questions to ask).
Think First Watch is the right franchise for you, or are you interested in other franchise opportunities in the food and beverage industry? Then, check out our listings page on the Vetted Biz website for thousands of franchises available for your investment.
