Taco Bell Franchise Cost Is Too High (2023)
Written by: Parth Parth
Last Updated by
Rocio Somoza: February 28, 2023
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Upon extensive review using a number of internet research tools, our team was able to compile a shortlist of the “Top 20 Most Popular Franchises in the United States.” In the article below, we review the business model proposed by one of these 20 franchises: Taco Bell franchise, as well as the requirements that encompass its franchise application process.
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Taco Bell Franchise
Taco Bell opened its first store in Downey, California in 1962 after its founder, Glen Bell, sold his former Taco store to his existing business partners. After having seen the success a business could make in selling tacos as the pilot dish in their menu, Bell decided to seek a larger challenge and instead developed the business model in place across all stores to this day that involves serving a variety of Mexican and Tex-Mex foods such as tacos, burritos and nachos.
Franchising began two years after Bell opened his first Taco Bell store, when Kermit Becky – a retired L.A. policeman – opened his own Taco Bell in Torrance, CA. Today, Taco Bell is now a subsidiary of Yum! Brands —an American fast-food corporation that owns other famous franchises like Pizza Hut and KFC.— and has over 6,800 franchised stores in the US and another 500 in international markets. Taco Bell is currently headquartered in Irvine, California, and is run by its CEO Mark King, who previously served as the president of Adidas North America and CEO of TaylorMade.
Taco Bell History
Taco Bell franchise is a fast-food Mexican restaurant concept that has operated units since the 1960s. They sell a variety of “Mexican-inspired food”, from tacos, burritos, quesadillas, nachos, and other value menu items. Taco Bell Franchisor, LLC was organized as a company in Delaware in 2016. In turn, they are owned by Taco Bell Corporation, which was organized in California in 1962.
Taco Bell Franchisor, or TBF, has been franchising units since 1964, making them one of the oldest franchises in the United States.
The origins of Taco Bell can be traced back to its founder Glen Bell. Who opened his own hot dog stand in 1948. After seeing long lines at a neighboring Mexican restaurant, he was inspired to learn how to make tacos for himself. And after undergoing several name changes, he settled on Taco Bell. Today, the headquarters of Taco Bell is found in Irvine, California, and its current standing CEO is Mark King.
The following data was taken from Taco Bell’s 2022 FDD as well as previous Franchise Disclosure Documents.
How Is Taco Bell and Parent, YUM! 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. KFC is part of Yum! Brands, Inc., which includes Pizza Hut and Taco Bell. YUM! Has over 53,000 restaurants in 157 countries and territories under the of KFC, Taco Bell, Pizza Hut, and The Habit Burger Grill systems. Over 98% of their restaurants are franchised locations.
How Much Is a Taco Bell Franchise?
The initial Taco Bell Franchise Fee for a regular franchise is $45,000 while the initial license fee for an express franchise is $22,500. You have to pay this upfront fee when opening a Taco Bell franchise.
Taco Bell Franchise Cost
The estimated total investment necessary to begin the operation of a Regular Taco Bell Franchise ranges from $1,298,600 – $3,370,100. The same cost for an Express Franchise is $227,500 – $590,100. The following costs are part of the upfront costs included in the initial investment for a Taco Bell. 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 Taco Bell franchise in 2022.
Regular Taco Bell
| Type of Expenditure | Amount |
|---|---|
| Background Check Fee | $350-600 per person |
| Initial Franchise Fee | $45,000 |
| First Unit Construction Services | $27,250 |
| Optional Real Estate Services | $0 – $37,250 |
| Permits, Licenses, Security Deposits | $74,000 – $125,000 |
| Real Property | $175,000- $1,400,000 |
| Building/Site Construction | $550,000- $1,200,000 |
| Equipment/Signage/Decor/POS | $375,000- $460,000 |
| Initial Inventory | $7,000- $10,000 |
| Grand Opening Expense | $5,000 |
Express Taco Bell
| Type of Expenditure | Amount |
|---|---|
| Background Check Fee | $350-600 per person |
| Initial License Fee | $22,500 |
| First Unit Design Services Fee | $2,000 – $5,000 |
| Land-First month’s rent | $2,100 – $4,5000 |
| Architectural Fees | $1,500 – $25,000 |
| Equipment Start-Up | $1,000- $10,000 |
| Equipment and Decor | $150,000 – $230,000 |
| Buildout and Construction | $250,000- $200,000 |
| Signs | $1,000- $14,000 |
| Shipping and Tax | $1,600- $15,000 |
| Cash Control Systems | $7,000- $25,000 |
| Deposits, Business, License, Permits | $500- $10,000 |
| Initial Inventory | $3,000- $8,500 |
| Additional Funds | $10,000- $20,000 |
| TOTAL | $227,500- $590,100 |
Taco Bell Franchise Requirements
Net worth: The current net-worth requirement is around $1.5 million worth of assets
Cash liquidity: Liquidity requirements are in the ballpark of $750,000.
Owning a Taco Bell Franchise Requires Ongoing Fees
For a regular Taco Bell franchise:
Grand Opening Expense: $5,000 to be spent by you for advertising and promoting the opening of the Unit
Period Franchise Fee: 5.5% of the Unit’s Gross Sales annually
Period Marketing Fee: 4.25% of the Unit’s Gross Sales annually
Support Costs: $5,244 per year
For an express Taco Bell location:
Royalty Fee: 10% of Gross Sales
Point of Purchase materials: Depending on the menu approved for use, the fee varies from a low of $110 per module or $990 per year to a high of $205 per module or $1,845 per year.
Support Costs: $5,244 per year
How Much Do Taco Bell Franchise Owners Make?
Taco Bell has not disclosed any data about its locations. We’re going to estimate sales for Taco Bell’s locations using their financial figures.
Let’s look at traditional Taco Bell Franchise locations. In 2021, 6,799 units made $11 billion in sales, amounting to an Average Unit Volume (AUV) of $1,617,884.
2021 Taco Bell AUV Sales: $1,617,884
| Initial Investment (Midpoint) | % Profit Margin of Average franchise sales | Estimated Profits | Time to recoup Investment |
|---|---|---|---|
| $2,334,350 | 10% | $161,788 | 17 years |
| $2,334,350 | 15% | $242,682 | 12 years |
| $2,334,350 | 20% | $323,576 | 9.5 years |
Based on the estimated sales provided by Taco Bell’s data, at an average of a 15% profit margin, it will take around 12 years to recoup your investment. This is longer than other franchise opportunities. You may not get a 15% profit margin, which would elongate getting a return on your investment.
Since Taco Bell franchise does not provide any information for Express stores, we cannot estimate volume, but looking at the number of stores, as discussed below, it looks like the stores do not have sustainable financials.
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 Food and Beverage stores; the extent of market penetration and brand awareness that Taco Bell stores have attained in your market. Also, the quality of management and service at your Franchised Store are major factors.
Is the Taco Bell Franchise Profit Worth the Franchise Cost?
To assign a valuation multiple for Taco Bell 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 – 0.31
$1 Million – $5 Million Net Sales
- Estimated Selling Price = Net Sales – 0.34
Over $5 Million Net Sales
- Estimated Selling Price = Net Sales – 0.59
When you go to sell a Taco Bell franchise based on the median multiple of .34 and AUV in 2021 of $1,617,884, it would sell for $550,080. This is significantly lower than the midpoint investment of $2,334,350.
Even as an owner of multiple Taco Bell franchises, you do not have the ability to make a profit. Owners in the Food and Beverage Industry with over $5 million in sales have a median multiple of .59. So, if you had 10 Taco Bell franchises this would be $16,178,840 in sales. That would sell for $9,545,515. This would be lower than your estimated initial investment of $23,343,500.
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.
Taco Bell Franchise
| Boynton Beach, FL (Palm Beach County) |
|---|
| Asking Price: | $155,000 | Cash Flow: | N/A |
| Gross Revenue: | $450,000 | Inventory: | $5,000+ |
| EBITDA: | N/A | Rent: | $3,500 per Month |
| FF&E: | $250,000 | Established: | 2010 |
As seen in the screenshot above, the franchise is going for 0.33x of gross revenue.
Statement of Cash Flows
| (in thousands) | Fiscal Year Ended December 28, 2021, December 29, 2020 and December 31, 2019 | ||
|---|---|---|---|
| 2021 | 2020 | 2019 | |
| Cash flows from operating activities | |||
| Net income | $467,054 | $371,230 | $320,872 |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||
| Non-cash distributions | (470,991) | (374,173) | (305,429) |
| Provision/(recovery) for doubtful accounts | (24) | (79) | 23 |
| Net change in operating assets and liabilities: | |||
| Changes in Accounts receivables, net | (7,588) | (1,327) | (18,920) |
| Changes in Franchise incentives | (270) | 964 | (876) |
| Changesin Due from affiliates | 830 | (1,344) | 1,322 |
| Changes in Due to affiliates | 4,000 | (300) | (400) |
| Changes in Deferred franchise fees | 11,938 | 6,342 | 9,642 |
| Cash used in operating activities | (43) | — | (39) |
| Cash flows provided by investing activities | — | — | — |
| Cash flows provided by financing activities | — | — | — |
| Restricted Cash and Restricted Cash Equivalents — Beginning of Year | $34,166 | $34,166 | $34,205 |
| Restricted Cash and Restricted Cash Equivalents — End of Year | $34,123 | $34,166 | $34,166 |
Statements of Income
| (in thousands) | Fiscal Year Ended | ||
|---|---|---|---|
| 2021 | 2020 | 2019 | |
| Revenues | |||
| Franchise and license fees | $415,233 | $322,647 | $269,871 |
| Royalties from affiliates | $51,7944 | $48,385 | $50,390 |
| Total Revenues | $467,027 | $371,032 | $320,261 |
| Costs and expenses | |||
| Bad debt expense | (24) | (79) | 23 |
| Total costs and expenses | (24) | (79) | 23 |
| Operating profit | 467,051 | 371,111 | 320,238 |
| Interest Income | 3 | 119 | 634 |
| Net income | $467,054 | $371,230 | $320,872 |
Taco Bell provides limited versions of their financial statements in their FDD. And they are less detailed and extensive compared to the financial statements of comparable franchises.
In 2021, Taco Bell franchise made over $467 million in revenue. Almost $100 million more than the previous year. The majority of their revenue came from franchise and license fees. While a small portion came from royalties from their affiliates. One interesting thing to note is that Taco Bell was able to dramatically decrease its costs and expenses in 2021, from $79,000 to $24,000. In fact, their loss from costs and expenses is made up of interest income, which amounted to over $3,000 in 2021.
Key Insights
So how does Taco Bell’s revenue compare to other contenders in the Food and Beverage industry? Despite the fact that they are one of the oldest franchisors, their revenue is surprisingly small compared to other major brands. For example, in our most recent analyses, we discovered that total sales revenue for Krispy Kreme was over $1.38 billion in revenue. While for Starbucks, their revenue was over $29 billion.
What about other fast food franchise concepts in the U.S.? In 2021, McDonald’s made over $8 billion in revenue. While Papa John’s made over $112 million in revenue. Another successful company in the industry, Domino’s Pizza, made over $205 million in revenue in 2021.
Despite these low numbers, it is impressive that Taco Bell franchise remains a profitable business. Although they have revealed limited financial information, from what has been released, Taco Bell has remarkably low costs and expenses. However, this does NOT necessarily mean that the financial success of Taco Bell is true for individual franchises. In fact, because Taco Bell does not allow financial representations to be made in regard to the performances of individual franchises, it cannot be known for sure how well franchisees will do with an investment in a Taco Bell establishment.
Although Taco Bell may have a relatively high net income, much of their income is not liquid, as shown in their cash flows statement. As a matter of fact, the $467 million that Taco Bell ended up with as net income amounts to about $34 million in cash.
How Many Taco Bell Units Have Opened and Closed?
The vast majority of Taco Bell outlets are franchised. At the end of 2020 they made up 97% of total existing Taco Bell units. And as of 2021, franchised outlets made up 93% of total existing Taco Bell units.
The following data points are true for traditional, Power Pumpers, and In-Line Taco Bell units, and are taken from Taco Bell’s 2022 FDD:
System-wide Outlet Summary for Taco Bell
| Outlet type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
|---|---|---|---|---|
| Franchised | 2019 | 6,446 | 6,622 | 176 |
| 2020 | 6,622 | 6,679 | 57 | |
| 2021 | 6,679 | 6,863 | 184 | |
| Company-Owned | 2019 | 462 | 467 | 5 |
| 2020 | 467 | 475 | 8 | |
| 2021 | 475 | 462 | 13 | |
| Total Outlets | 2019 | 6,908 | 7,089 | 181 |
| 2020 | 7,089 | 7,154 | 65 | |
| 2021 | 7,154 | 7,325 | 171 |
Growth Rate
Overall, while Taco Bell has a very strong growth rate for their franchises, this growth rate has been slowly yet steadily declining for the past three years. However, there were more projected new outlets for 2020 at 214 new outlets, compared to 2019. At the same time, Taco Bell has been closing more outlets over the years, but not by a dramatic increase.
The following data points are in reference to Taco Bell Express (Custom Facade) units. In their 2021 FDD, these units are referred to as “licensed” units:
System-wide Outlet Summary for Taco Bell EXPRESS
| Outlet type | Year | Outlets at the Start of the Year | Outlets at the End of the Year | Net Change |
|---|---|---|---|---|
| Licensed | 2019 | 359 | 324 | -35 |
| 2020 | 324 | 258 | -66 | |
| 2021 | 258 | 252 | -6 | |
| Company | 2019 | 10 | 10 | 0 |
| 2020 | 10 | 7 | -3 | |
| 2021 | 7 | 7 | 0 | |
| Total | 2019 | 369 | 334 | -35 |
| 2020 | 334 | 265 | -69 | |
| 2021 | 265 | 259 | -6 |
As is very evident, Taco Bell Express stores are closing rapidly. From 369 in 2019 to 259 in 2021, 30% of Taco Bell Express stores closed in the 3-year period. This is not a good sign and is clearly not pandemic-induced.
Taco Bell in Numbers
When evaluating a Taco Bell franchise potential for growth, one does not need to go beyond Quick Service Restaurant numbers to better understand the prospect for success of the opportunity at hand. The fast-food industry generated $200 billion in revenues in 2015. The industry has since been expected to have an annual growth of 2.5% for the following subsequent years. Of these $200 billion in revenues, Mexican restaurants were responsible for 7% of the market share and Taco Bell itself was ranked number 4 in QSR Magazine’s top 50 of 2020 losing only to McDonald’s, Chick-fil-A and Starbucks.
Looking at the franchise’s internal performance, although limited data was made available on the financial status of the company’s franchisees, it was found that only 32 franchises ceased operations in 2018 – an insignificant value when contrasted with the total amount of franchises under Taco Bell’s franchise system. Moving forward, Taco Bell franchise is looking to establish new units across the country and particularly in urban areas such as Chicago and San Francisco where their target audience is more concentrated around.
Is Taco Bell Franchise Worth the Investment?
There are both pros and cons to investing in a Taco Bell franchise. Taco Bell as a corporation is a profitable business, but it is unclear if this profitability extends to individual franchise units. After all, the lack of detail in their financial statements means that the only visible source of revenue is from franchise and license fees (along with affiliate royalty fees), and combined with the fact that Taco Bell has rather high royalty rates could be a negative sign for potential franchisees.
However, at the same time, Taco Bell has shown significant growth in the number of franchised units. They are opening significantly more stores than closing them down, which could point to a sustainable business model. However, it is important to note that this is only true for traditional, free-standing Taco Bell units — for Taco Bell Express franchises the number of units has actually been decreasing.
Although both fall under the umbrella of the Taco Bell Corporation, due to their many structural differences they are considered as two separate franchise entities.
Taco Bell Franchise Business Model
There are four different types of Taco Bell franchise that one can invest in. They include elaborate facilities with multiple facets as well as more compact spaces with limited operating ability.
“Traditional Units” the largest types of Taco Bell franchise. Coming with their own kitchen, counter, sit-down area, and usually their own drive-thru.
“In-line Units” have the same features as traditional units. Although they may or may not have their own drive-thru. Those with a drive-thru are referred to as “End-caps”. However, unlike traditional free standing units they are built for more compact areas with high traffic, like busy street corners.
“Power Pumpers” have the same features as the above two units. But they are distinct because they share facilities with a gas and convenience store.
“Taco Bell Express” are Taco Bell franchise units that are far less elaborate than the three units mentioned above. Accompanied by a limited section of menu items. They are frequently referred to as “Custom Facades”. They are often considered separately as a franchise and as a result have their own franchise disclosure document.
YUM! Brands International
YUM’s history started when PepsiCo acquired Pizza Hut and then Taco Bell in 1977 and then 1978. In 1986, KFC was then sold to PepsiCo. It went on to acquire Chevys Fresh Mex, D’Angelo Grilled Sandwiches, and the American Division of East Side Mario’s. These chains were then sold when Pepsi exited the restaurant market.
Yum! was created in 1997 under the name of Tricon Global Restaurants, Inc. as the parent corporation of KFC, Pizza Hut, and Taco Bell. It selected Louisville as its HQ.
In 2000, Tricon Global, along with Yorkshire Global, tested multi-branded locations which turned out to be a huge success. By 2002, the test consisted of 83 KFC/A&Ws, 6 KFC/Long John Silver’s, and 3 Taco Bell/Long John Silver’s. In March 2002, they merged to form Yum! Brands. In the same year, Yum! began testing co-branding locations pairing Pizza Hut with Pasta Bravo, Backyard Burgers, and A&W. An East Dawning test cafeteria-style restaurant was opened in Shanghai in 2004. East Dawning is the fusion of KFC with Chinese-style cuisine and in 2007, 8 East Dawning Restaurants were in operation.
In 2011, Yum! sold Long John Silver’s and A&W to focus on KFC, Pizza Hut, and Taco Bell. The same year, they agreed to purchase the Chinese hot pot chain Little Sheep for HK $4.56 billion. In 2012, KFC opened a location in the West Bank, becoming the first American Fast Food chain to do so. In the first quarter of 2015, Third Point Management and Corvex Management separately acquired an unspecified stake in the company.
The current CEO of Yum! Brands is David Gibbs. Former CEOs include Greg Creed and David C. Novak. Since 2006, Yum! Brand has served as the corporate sponsor of the Kentucky Derby. On October 20, 2015, Yum! Brands announced that it intended to separate into two independent, publicly-traded companies. Yum China was spun off on November 1, 2016.
YUM! Domestic and Global Plans and Performance
YUM’s stock has grown steadily since 2016. When compared to the market benchmark for its industry, the S&P Consumer Discretionary, it has not grown as fast. However, its growth has still outpaced the S&P 500.
In 2020, YUM received an approximate 5% minority interest in Devyani International Limited, an entity operating KFC and Pizza Hut franchised units in India.
Consolidated Statements of Income
| Fiscal years ended December 31, 2021, 2020, and 2019 | |||
| 2021 | 2020 | 2019 | |
|---|---|---|---|
| Revenues | |||
| Company Sales | $2,106 | $1,810 | $1,546 |
| Franchise and property revenues | $2,900 | $2,510 | $2,660 |
| Franchise contributions for advertising and other services | $1,578 | $1,332 | $1,391 |
| Total Revenues | $6,584 | $5,652 | $5,597 |
| Costs and Expenses, Net | |||
| Company restaurant expenses | $1,725 | $1,506 | $1,235 |
| General and administrative expenses | $1,060 | $1,064 | $917 |
| Franchise and property expenses | $117 | $145 | $180 |
| Franchise advertising and other services expense | $1,576 | $1,314 | $1,368 |
| Refranchising (gain) loss | (35) | (34) | (37) |
| Other (income) expense | 2 | 154 | 4 |
| Total Costs and expenses, net | $4,445 | $4,149 | $3,667 |
| Operating Profit | $2,139 | $1,503 | $1,930 |
| Investment (income) expense, net | (86) | (74) | 67 |
| Other pension (income) expense | 7 | 14 | 4 |
| Interest expense, net | 544 | 543 | 486 |
| Income before income taxes | $1,674 | $1,020 | $1,373 |
| Income tax provision | 99 | 116 | 79 |
| Net Income | $1,575 | $904 | $1,294 |
In 2021, YUM had a comprehensive income of $1.57 million, up from $1.29 million in 2019. This represents a 21.7% growth in net income for the food behemoth. To raise these funds, they issued a lot of promissory notes, as detailed below:
| Issuance Date | Maturity Date | Principal Amount (in millions) | Interest Rate (Stated) | Interest Rate (Effective) | ||
|---|---|---|---|---|---|---|
| October 2007 | November 2037 | $325 | 6.88% | 7.45% | ||
| October 2013 | November 2023 | $325 | 3.88% | 4.01% | ||
| October 2013 | November 2043 | $275 | 5.35% | 5.42% | ||
| September 2019 | January 2030 | $800 | 4.75% | 5.42% | ||
| April 2020 | April 2025 | $600 | 7.75% | 8.05% | ||
| September 2020 | March 2031 | $600 | 3.63% | 3.77% | ||
| April 2021 | January 2032 | $1,100 | 4.63% | 4.77% | ||
The annual maturities of all Short-term borrowings and long-term debt as of December 31, 2021, excluding finance lease obligations of $64 million, and debt issuance costs and discounts of $93 million are as follows:
| Year Ended | ||||
|---|---|---|---|---|
| 2022 | $68 | |||
| 2023 | $398 | |||
| 2024 | $87 | |||
| 2025 | $692 | |||
| 2026 | $1,606 | |||
| Threafter | $8,424 | |||
| TOTAL | $11,275 | |||
This puts YUM in a consolidated debt of $11.27 billion as of today. Its financials are strong, but the credit they are operating on might start matching its net cash inflows. Interest expense on Short-term borrowings and Long-term debt were $551 million, $558 million, and $519 million in 2021, 2020, and 2019, respectively.
Yum!’s digital sales reached a single-quarter record of $4 billion in Q3 2020. More than 35,000 of its restaurants globally now offer delivery, which is an 11 percent rise from 2019.
Conclusion
While Taco Bell is a strong franchisor and Yum! Brands is also in a strong financial position, the Taco Bell Franchises do not look like having the potential to make profits. The express business is doing worse and is rapidly declining. We believe that the cost for a Taco Bell franchise is too high at this time, but we recommend talking to existing franchisors to get a better idea of the business’ financials.
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.
