Mellow Mushroom Franchise: A slice of the American Dream (2022)
Written by: Parth Parth
Last Updated by
Marina Longo: August 12, 2022
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Mellow Mushroom is an American pizza restaurant chain that was first established in Atlanta, GA in 1974. It was established by two college students from Georgia Tech who were then joined by another student from UGA. Its franchises operate under the corporate name of Home Grown Industries Inc. with 173 locations in the country in 2021. It is currently led by Richard Brasch who is the owner and CEO of Home Grown Industries. Their selling point to prospective franchisees is that they allow creative freedom for the look of their restaurants and are not a cookie-cutter location offering company.
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How is Mellow Mushroom Franchise Positioned in the Food and Beverage Industry?
The Food and Beverage industry in the USA accounts for 13% of all manufacturing employment in the country. Around 1.46 million people are employed in this industry. Food franchises make up to 36% of the total franchise establishments in the USA and it is expected to create 1.6million more jobs by 2027.
The annual growth rate in the industry is around 2% and the EBITDA multiplier is around 3x.
Mellow Mushroom competes in the pizza market against big name brands like Dominos, Pizza Hut, etc.
How Much is a Mellow Mushroom Franchise?
The initial Franchise Fee is $50,000. You have to pay this upfront fee when opening a franchise.
Mellow Mushroom Franchise Cost
The estimated total investment necessary to begin operation ranges from $1,646,000 – $2,438,000. The following costs are part of the upfront costs included in the initial investment for a Mellow Mushroom. Many of these are one-time fees that are needed to launch the franchise. Review the chart below to see how much it costs to buy a Mellow Mushroom franchise in 2022.
Estimated Initial Investment
| Type of expediture | Amount |
|---|---|
| Initial Franchise Fee | $50,000 |
| Art Package Fee | $28,000-$38,500 |
| Architectural Fee | $75,000-$115,000 |
| One Month’s Rent | $10,000-$21,500 |
| Security Deposit | $10,000-$21,500 |
| Retail Merchandise Display (including Inventory) | $0-$18,000 |
| Equipment | $280,000-$350,000 |
| Leasehold Improvements | $750,000-$1,200,000 |
| Signage | $40,000-$70,000 |
| Opening Inventory | $55,000-$78,000 |
| Small Wares | $28,000-$35,000 |
| Pre-Opening Labor and Training Expenses | $95,000-$105,000 |
| Insurance | $5,000-$8,000 |
| POS System and other Back-Office Technology System | $30,000-$50,000 |
| Audio-Visual Equipment | $40,000-$80,000 |
| Miscellaneous Opening Costs | $15,000-$17,500 |
| Additional Funds – 3 months | $50,000 |
| Total Estimated Initial Investment (including real estate lease costs for 1 month) | $1,646,000-$2,438,000 |
This is much higher than other pizza franchises with less than $1 million being more typical. However, this is in huge part due to the creative freedom they allow their locations.
Mellow Mushroom Franchise Requirements
- You have been frugal, fiscally responsible, or lucky enough to pile up the $500,000 cash or cash equivalent it takes to open a Mellow Mushroom.
- They require you or one of your principals to have a background in restaurant operations as an owner, multi-unit franchise partner, or operations management executive.
- Franchisees sign a Franchise Agreement. Each restaurant has its own separate Franchise Agreement. Each agreement provides a 15-year right to operate as a Mellow Mushroom and contains all terms and conditions pertaining to the operation of the restaurant.
- Some franchisees may sign a Development Agreement. The Development Agreement provides the exclusive development rights for a specific number of restaurants over a particular period of time and a territory agreed upon by HGI’s and the franchise developer.
Owning a Mellow Mushroom Franchise Requires Ongoing Fees
Royalty: 5% of Restaurant’s Weekly Gross Sales
Brand Development Fund: Up to 3% of Restaurant’s Weekly Gross Sales (current
These figures are pretty standard for this industry.
How much do Mellow Mushroom franchise owners make?
They do not represent the financials of its franchised location, but we looked at Mellow Mushroom franchises for sale on BizBuySell and other sites to figure out an estimate of revenue and franchise owner salary.
2021 Mellow Mushroom Median Estimated Franchise Sales: $1,523,3100
| Initial investment (midpoint) | %Profit margin of median franchise sales | Estimated Profits | Time to recoup investments |
|---|---|---|---|
| $2,042,000 | 10% | $152,331 | 16 years |
| 15% | $228,496 | 11.5 years | |
| 20% | $304,662 | 9.5 years |
Based on the median sales estimated Mellow Mushroom’s franchise locations, at an average of a 15% profit margin it will take around 11.5 years to recoup your investment. This is in the same range as some other franchise opportunities. You may not get a 15% profit margin which would elongate getting a return on your investment. However, since this pizza franchise offers a highly personalized experience, their sales or profit margin might be higher than our estimate, leading to a quicker recovery of investment.
Many factors affect the sales, costs, and expenses of your Franchised Store. Such as the Franchised Store’s size, geographic location, menu mix, and competition in the marketplace. The presence of other pizza stores; the extent of market penetration and brand awareness that your stores have attained in your market. Also, the quality of management and service at your Franchised Store are major factors
Is the Mellow Mushroom Franchise Profit Worth the Franchise Cost?
To assign a valuation multiple for Mellow Mushroom 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 larger franchise industry as well as selling price multiples for larger systems where more transaction data is available.
Under $1 Million Net Sales
- Estimated Selling Price = Net Sales – 0.54
$1 Million – $5 Million Net Sales
- Estimated Selling Price = Net Sales – 0.67
Over $5 Million Net Sales
- Estimated Selling Price = Net Sales – 1.21
When you go to sell a Mellow Mushroom franchise based on the median multiple of .67 and net sales estimate in 2021 of $1,523,310, it would sell for $1,020,617. This is significantly lower than the midpoint investment of $2,042,000. However, our multiple does not represent the added value to your location because of the freedom of aesthetics. If accounted for that and the right customer, your location might sell for much more.
The more franchises you own, the more earning potential you have as private equity firms become interested in your business instead of individual owner-operators.
Mellow Mushroom (Franchisor) Income Statement Key Insights
Consolidated Statements of Earnings
| Years ended in September 30, | ||
| 2021 | 2020 | |
|---|---|---|
| Revenues: | ||
| Restaurant Sales | $7,914,501 | $6,703,778 |
| Franchise royalties, advertising, and fees | $28,727,966 | $23,981,220 |
| Commissary sales | $17,657,093 | $14,888,599 |
| Other | $43,000 | $43,000 |
| Total revenues | $54,342,560 | $45,616,597 |
| Costs and expenses: | ||
| Cost of sales | $2,264,990 | $1,978,878 |
| Operating | $5,072,940 | $4,739,454 |
| Corporate operating costs | $34,046,738 | $30,570,215 |
| Total costs and expenses | $41,384,668 | $37,288,547 |
| Income from operations | $12,957,892 | $8,327,050 |
| Other income (expense) | ||
| Interest income | $929 | $2,784 |
| Interest expense | $(133,633) | $(244,173) |
| Gain on sale of property and equipment | $- | $(968) |
| Other, net | $4,054,914 | $(39,284) |
| Net income | $16,880,102 | $8,046,409 |
Mellow Mushroom is a very profitable business for the franchisor with retained earnings of $16 million in 2021. Compared to $8 million in 2020, they saw an increase of 100% from 2020 to 2021. This is a good indication of high growth as a company overall.
How many Mellow Mushroom units have opened and closed?
Systemwide Outlet Summary
| Outlet type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
|---|---|---|---|---|
| Franchised | 2019 | 187 | 187 | 0 |
| 2020 | 187 | 173 | -14 | |
| 2021 | 173 | 169 | -4 | |
| Company-Owned | 2019 | 2 | 4 | +2 |
| 2020 | 4 | 4 | 0 | |
| 2021 | 4 | 4 | 0 | |
| Total Outlets | 2019 | 189 | 191 | +2 |
| 2020 | 191 | 177 | -14 | |
| 2021 | 177 | 173 | -4 |
Mellow Mushroom (Franchisor) Income Statement Key Insights:
Over the last three years, the company has been in decline. Franchising units have steadily decreased. Over the last three years, franchises have closed at a rate of 6 units a year. This is an indicator that these stores may not be performing well or their franchise term is up and they are not renewing it. Since this is not a regular pizza business, it is also possible that those numbers have taken a hit due to COVID and might start improving again.
Conclusion
Mellow Mushroom offers people the opportunity to be a part of a business that has been a consistent American staple fast food. They add their twist to it by allowing owners to customize their locations to their tastes. If you feel like you want creative control over the look of your restaurant, we recommend talking to existing owners about their designs and business models.
While this may be the business for you, make sure to also check out other businesses offered on Vetted Biz and in the Food and Beverage Industry.
