Zaxby’s franchise concept: the Zmall Business (2023)
Written by: Nida Fatima
Last Updated by
Marina Longo: January 19, 2023
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Zaxby’s is a private fast-casual restaurant chain in the United States. The very first Zaxby’s opened in 1990 in Statesboro, GA by co-founder and CEO Zach McLeroy. Today, Zaxby’s franchise has 908 (as of 2021) stores in the U.S., and aims to “bring encore experiences that enrich lives, one person at a time”. In recent news, CEO Zach McLeroy also bought out his partner, Tony Townley, the share of the company in early 2021.
Its popular menu items include chicken wings, chicken fingers, sandwiches, and salads. It is a growing business with 908 stores in the US as of 2021.
Data collected and analyzed here at Vetted Biz has concluded that the food and beverage industry overall has an average stability rate of 77% and a growth rate of 15.5% over the past few years.
Contents
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Zaxby's Franchise Cost
The initial investment and ongoing fees for opening a Zaxby’s franchise are highlighted below.
How much is a Zaxby’s Franchise?
| Estimated Initial Investment | |||
| Type of Expenditure | Low Amount | High Amount | To Whom Payment is Made |
|---|---|---|---|
| Initial Franchise Fee | $35,000 | Zaxby’s | |
| Lease Deposit and Payment | $10,000 | $19,000 | Landlord |
| Utility Deposits | $0 | $9,000 | Utilities |
| Initial Inventory | $5,000 | $22,000 | Vendors |
| Furniture, Fixtures & Equipment | $330,000 | $399,000 | Vendors |
| Technology System | $67,200 | $92,200 | Vendors |
| Signage | $23,000 | $134,000 | Vendors |
| Initial Marketing Contribution | $5,200 | $10,000 | Zaxby’s |
| Insurance | $1,000 | $17,000 | Insurance Company or Broker |
| Permits and Licenses | $2,000 | $24,000 | Government Authorities |
| Accounting and Legal Fees | $500 | $25,000 | Professionals |
| Printing/Business Supplies | $300 | $1,000 | Vendors |
| Uniforms | $1,500 | $4,000 | Vendors |
| Training Expenses | $10,000 | $25,000 | Hotels, Airlines, etc. |
| Pre-Opening Payroll | $10,000 | $37,000 | Employees |
| Additional Funds – 3 months | $1,000 | $96,000 | Vendors, employees, Utilities, etc. |
| TOTAL | $501,700 | $950,200 | |
Overall, the initial investment ranges from $501,700 to $950,200.
Ongoing fees
Apart from the initial investment, other fees include 6% of gross sales per week, accounting services as well as marketing/advertising contributions.
Zaxby’s Franchising Requirements
Additional requirements include a net worth requirement of $1,000,000 and a liquid cash requirement of $500,000, which is again quite high for a potential franchise owner.
How much does a Zaxby’s franchise owner make?
| Summary of Gross Revenues of Measured Restaurants in Fiscal Year 2021 | |||||||
| Quartile | Restaurant Count | Average Gross Revenues | # of Restaurants Above Average Gross Revenues | % of Restaurants Above Average Gross Revenues | Median Gross Revenues | Lowest Gross Revenues | Highest Gross Revenues |
|---|---|---|---|---|---|---|---|
| Top Quartile | 182 | $3,468,473 | 68 | 37.4% | $2,968,423 | $2,646,626 | $ |
| Second Quartile | 182 | $2,724,487 | 89 | 48.9% | $ | $ | $ |
| Third Quartile | 181 | $2,274,123 | 94 | 51.9% | $ | $ | |
| Bottom Quartile | 182 | $1,708,846 | 110 | 60.4% | $ | $ | $ |
| All Measured Restaurants | 727 | $2,544,354 | 344 | 47% | $2,497,295 | $839,494 | $5,331,733 |
Zaxby’s Ownership
| Average Annual Gross Revenues of Franchised Restaurants In Fiscal Years 2019, 2020, and 2021 | ||||||||
| Year | Restaurant Count | Average Gross Revenues | % Change Over Previous Year | # of Restaurants Above Average Gross Revenues | % of Restaurants Above Average Gross Revenues | Median Gross Revenues | Lowest Gross Revenues | Highest Gross Revenues |
|---|---|---|---|---|---|---|---|---|
| 2019 | 722 | $2,179,984 | – | 334 | 46.3% | $2,117,443 | $497,882 | $4,324,891 |
| 2020 | 725 | $2,256,060 | 3.5% | 357 | 49.2% | $2,237,850 | $630,400 | $4,284,533 |
| 2021 | 727 | $2,544,354 | 12.8% | 344 | 47.3% | $2,497,295 | $839,494 | $5,331,733 |
The average gross revenues of the franchised stores in 2021 were $2,544,354, a 12.8% change from last year. Considering that COVID had negatively impacted the food and beverage industry during this year, it is impressive that the average sales increased since the previous years.
How long will it take to recoup your initial investment?
Based on the 2020 average gross revenues for a Zaxby’s franchise of $2,248,862, and a midpoint initial investment of $534,750:
| Initial investment (midpoint) | % Profit margin of median franchise sales | Estimated Profits | Time to recoup investments |
|---|---|---|---|
| $534,750 | 10% | $224,000 | 5 years |
| 15% | $337,000 | 3.5 years | |
| 20% | $448,000 | 2.5 years |
Keep in mind, it can take 2.5 years for a food and beverage franchise to open, break-even then reach stabilization.
Is the Franchise Profit Worth the Zaxby’s Franchise Cost?
Zaxby’s Financial Income Statement
| For the Fiscal Years Ended: | ||
| Consolidated Statements of Operations | December 27, 2020 | December 29, 2019 |
|---|---|---|
| Revenues: | ||
| Franchisee royalties | $ 115,234,028 | $ 112,031,392 |
| Franchise fees | 1,508,999 | 2,210,287 |
| Incentive payment fees | 8,324,765 | 8,466,910 |
| Advertising and conference fund revenue | 37,686,590 | 34,673,216 |
| Other fees | 169,457,321 | 7,578,586 |
| Total revenues | 169,457,321 | 164,960,391 |
| Operating expenses: | ||
| Salaries and benefits | 50,696,044 | 30,386,743 |
| Selling, general, and administrative | 61,220,079 | 57,889,240 |
| Depreciation | 2,616,007 | 2,693,758 |
| Total operating expenses | 114,532,130 | 90,969,741 |
| Income from operations | 54,925,191 | 73,990,650 |
| Other income: | ||
| Other income, net | 530,413 | 75,212 |
| Net income | 55,455,604 | 74,065,862 |
| Net loss attributable to non-controlling interests | (2,552,740) | (110,968) |
| Net income attributable to ZFL and Subsidiaries | $58,008,344 | $ 74,176,830 |
Income Statement Key Insights
From 2019 to 2020, there was a slight increase (an increase of about 2.73%) in the total revenues made by Zaxby’s. Mostly owing to franchise royalties. However, there was also a significant increase (an increase of about 25.90%) in operating expenses, mostly due to an increase in salaries and benefits at a time when COVID was on the rise. Since there was only a slight increase in the revenues and a relatively large increase in the costs, this led to a significant decrease in income from operations (a decrease of about 25.77%) and net income for the year (a decrease of about 21.80%). Hence the company’s profits definitely deteriorated in 2020 compared to previous years because of COVID.
Consolidated Statements of Cash Flows
| For the Fiscal Years Ended: | ||
| December 27, 2020 | December 29, 2019 | |
| Cash flows from operating activities: | ||
| Net income attributable to ZFL and Subsidiaries | $ 58,008,344 | $ 74,176,830 |
| Adjustments to reconcile net income attributable to ZFL and Subsidiaries to net cash provided by operating activities: | ||
| Net loss attributable to non-controlling interests | (2,552,740) | (110,968) |
| Depreciation | 2,616,007 | 2,693,758 |
| (Gain) loss on disposal of assets | (30,176) | 52,136 |
| Realized (gain) loss on sale of investments | (57,548) | 7,728 |
| Unrealized gain on insurance policies | (1,099,622) | (983,507) |
| Changes in operating assets and liabilities: | ||
| Receivables | (1,010,080) | 74,714 |
| Advertising and conference cooperative assets, restricted and liabilities | 2,552,739 | 110,968 |
| Prepaid expenses and other current assets | 357,155 | 56,016 |
| Deposits and other assets | 700 | (35,076) |
| Accounts payable and accrued expenses | (591,779) | 264,161 |
| Deferred compensation liability | 2,837,925 | 2,853,614 |
| Deferred revenue | (1,402,803) | (1,865,076) |
| Gift card liability | 2,109,696 | (1,811,730) |
| Net cash provided by operating activities | 61,737,818 | 75,483,568 |
| Cash flows from investing activities: | ||
| Purchase of property and equipment | (889,050) | (803,542) |
| Purchase of investments | (502,762) | (630,848) |
| Proceeds from sale of property and equipment | 66,535 | – |
| Proceeds from sale of investments | 1,099,742 | 368,769 |
| Purchase of insurance policies | (1,631,892) | ( 1,744,638) |
| Net cash used in investing activities | (1,857,427) | ( 2,810,259) |
| Cash flows from financing activities: | ||
| Distributions to member | (62,294,124) | (75,000,000) |
| Net cash used in financing activities | (62,294,124) | (75,000,000) |
| Net decrease in cash and cash equivalents | (2,413,733) | (2,326,691) |
| Cash and cash equivalents at beginning of fiscal year | 4,910,260 | 7,236,951 |
| Cash and cash equivalents at end of fiscal year | $ 2,496,527 | $ 4,910,260 |
Zaxby’s Cash Flow Statement Key Insights
The positive cash flows from operating expenses decreased from 2019 to 2020 by 18.21 %, reaching a value of $61,737,818. At the same time, the negative cash flows from investing activities and financing activities also decreased from 2019 to 2020 by about 33.91% and 16.94% respectively. This led to an overall net decrease in cash of $2,413,733 by the end of 2020, a 3.74% deprovement from the previous year’s net decrease in cash. The cash and cash equivalents at the end of 2020 were $2,496,527.
How many Zaxby’s units have opened and closed?
| Systemwide Restaurant Summary For Years 2018 to 2020 | ||||
| Restaurant Type | Year | Restaurants at the Start of the Year | Restaurants at the End of the Year | Net Change |
|---|---|---|---|---|
| Franchised | 2018 | 736 | 757 | +21 |
| 2019 | 757 | 756 | -1 | |
| 2020 | 756 | 762 | +6 | |
| Affiliate- Owned | 2018 | 141 | 141 | 0 |
| 2019 | 141 | 149 | +8 | |
| 2020 | 149 | 146 | -3 | |
| Total Restaurants | 2018 | 877 | 898 | +21 |
| 2019 | 898 | 905 | +6 | |
| 2020 | 905 | 908 | +3 | |
According to the table above, we can see that during 2018, the franchised stores increased by 21 whereas there was no focus on increasing affiliate-owned stores. However, in 2019, the total change in franchised stores was -1. While the affiliate-owned restaurants went up by 8 overall. Finally, in 2020, there was an increase in franchised stores by 6. And a decrease in affiliate-owned stores by 3. Leading to a final store composition of 762 (83.9% of total) franchised stores and 146 (16.1% of total) affiliate-owned stores by the end of 2021. This seems quite promising for potential franchise owners. The details of these various branches’ locations are given below.
Transfers of Restaurants from Franchisees to New Owners (Other than the Franchisor)
| For Years 2018 to 2020 | ||
| State | Year | Number of Transfers |
|---|---|---|
| Alabama | 2018 | 3 |
| 2019 | 12 | |
| 2020 | 0 | |
| Arkansas | 2018 | 0 |
| 2019 | 0 | |
| 2020 | 0 | |
| Florida | 2018 | 0 |
| 2019 | 6 | |
| 2020 | 2 | |
| Georgia | 2018 | 5 |
| 2019 | 8 | |
| 2020 | 10 | |
| Indiana | 2018 | 1 |
| 2019 | 0 | |
| 2020 | 1 | |
| Kentucky | 2018 | 0 |
| 2019 | 0 | |
| 2020 | 0 | |
| Louisiana | 2018 | 0 |
| 2019 | 0 | |
| 2020 | 0 | |
| Mississippi | 2018 | 0 |
| 2019 | 1 | |
| 2020 | 0 | |
| Missouri | 2018 | 0 |
| 2019 | 0 | |
| 2020 | 0 | |
| North Carolina | 2018 | 1 |
| 2019 | 5 | |
| 2020 | 1 | |
| Oklahoma | 2018 | 0 |
| 2019 | 0 | |
| 2020 | 3 | |
| South Carolina | 2018 | 0 |
| 2019 | 3 | |
| 2020 | 6 | |
| Tennessee | 2018 | 0 |
| 2019 | 2 | |
| 2020 | 2 | |
| Texas | 2018 | 0 |
| 2019 | 0 | |
| 2020 | 7 | |
| Virginia | 2018 | 5 |
| 2019 | 0 | |
| 2020 | 0 | |
| Total | 2018 | 15 |
| 2019 | 37 | |
| 2020 | 32 | |
Potential risks to consider before investing in a Zaxby’s franchise
Some of the risks in growth strategies and operations for Zaxby’s include:
1. COVID and other pandemic outbreaks:
Zaxby’s, 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.
2. 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.
3. 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.
4. Risks associated with expanding to new and unfamiliar locations:
Since Zaxby’splans 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.
5. Incidents involving food safety and food-borne illnesses could adversely affect guests’ perception of our brand, result in lower sales and increase operating costs.
Some additional risks 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 Georgia, which may force you to accept a less favorable settlement for disputes and cost more to arbitrate or litigate with the franchisor in Georgia than in your own state.
About them
They state in their website, they INVENTED “ZMALL BUSINESS”.
Take the concept of small business and add Zignificant resources, and what do you get? We call it Zmall business. From day one, Zaxby’s has been about building your own local brand in the community. And we’re here to help you do just that. So don’t just think big. Think Zmall.
Zach McLeroy, CEO, and founder of Zaxby’s
He has grown a billion-dollar franchise through hard work, resiliency, and determination that all began with a dream and an opportunity in 1990.
Over the past 30 years, he has built the Zaxby’s brand into more than just a quick-service chicken chain. He has found the secret to success is serving our communities quality food, providing team members opportunity, creating a definable culture of service, and collaborating with strategic partners to grow the brand to new heights.
Under Zach’s leadership, Zaxby’s has been recognized in numerous publications and trades throughout the years. Most recently, Forbes listed Zaxby’s as one of its Best Large Employers in 2021 as well as Dealmakers of the Year 2021 by Franchise Times for our new partnership with Goldman Sachs.
Today, he oversees all business functions through a strong leadership team, collaborates with our partners at Goldman Sachs, and continues to cast vision for Zaxby’s bright future.
Zach McLeroy, Founder & Chairman of the Board
The Zaxby’s CEO, Zach McLeroy has grown a billion dollar franchise through hard work and resiliency.
In 1990 he had an opportunity to build his first restaurant which started out as just another small fast-food joint but quickly became known for its quality food along with being franchises that take care of their communities by providing team members opportunities while collaborating strategically partners who help them grow the brand new heights it’s reached today.
Bernard Acoca, Chief Executive Officer
Bernard joined Zaxby’s in January 2022 as its first incoming CEO. He brings an abundance of experience and knowledge from the QSR industry, most recently serving at El Pollo Loco where he led their transformation into modern day chickens with digital e-commerce capabilities while streamlining drive through orders for quick service! Before this position there was also a time spent working on development opportunities within Starbucks’ leadership team where they doubling down on brand positioning by renewing restaurant design prior to aggressive franchise expansion domestically and internationally.
Most recently, Bernard was the CEO of El Pollo Loco where he oversaw the company’s transformation into a modern day chicken restaurant with digital e-commerce capabilities. Prior to that, he worked on development opportunities within Starbucks’ leadership team.
Mike Mettler, Chief Development Officer
Mike has spent 16 years in the franchising industry, developing several leading global franchise brands by recruiting industry-leading operators and building world class teams. He started his career with start ups to turnarounds of businesses large companies before moving on to mergers acquisitions & business development where he served as President for three different electronics firms that operated around nicotine products including cigarettes pipes chewing gum etc., which is what brought him here at Zaxby’s.
Blake Bailey, Chief Financial Officer
Blake has been a crucial part of Zaxby’s success since he joined the company over 15 years ago. During this time, Blake helped build financial infrastructure that is now supporting 900+ locations and working with other leaders to develop strategies for future growth initiatives.
He holds an entrepreneurial spirit as well; serving on several nonprofit boards including Downtown Ministries Inc., where they help people in need by providing food & clothing donations or services such as job training programs so no one goes without hope.
Mike Nettles, Chief Digital Technology Officer
Mike Nettles is a digital guru with experience in designing and implementing complex technology solutions for brands such as Papa John’s, Panera Bread Co., GameStop Corporation (formally Binterrupted) among others. He joined the Zaxby’s team this year to help streamline their processes using various technologies while creating harmony through personalization across all channels by leveraging his innovative knowhow that he has developed over time at companies like these ones.
Keith Anderkin, Chief Supply Chain Officer
Keith is the first Chief Supply Chain Officer for Zaxby’s and in just three months, he has already become an integral part of their team. With over 25 years experience working with brands like Arby’s or Long John Silvers; Keith excels at fostering relationships between vendors/franchisees while also maintaining high standards when it comes down to quality assurance (food safety). As one would expect from someone who attended college locally – UK grad himself- his knowledge on how best optimize sourcing strategies so they can meet all goals set forth within category management without fail makes him invaluable.
Brenda Tickey, General Counsel
Brenda, a highly qualified lawyer who is passionate about serving the people and building lasting relationships with those she serves was thrilled to be asked by Zaxby’s if they could hire her as their first ever in-house General Counsel.
North Carolina native Brenda brings over ten years experience working on culture driven teams at places like Marriott International or Popeye’s where service is not just expected but demanded! Her deep understanding of what it means for an organization – both internally within its own walls but also externally towards customers-, makes this such a perfect fit when you think about how different yet similar these two companies are.
Conclusion
As mentioned earlier, Zaxby’s is a growing business within the food and beverage industry. The initial investment ranges from around $351,000 to 718,500. With ongoing fees like royalty of 6% as well as marketing and advertising fees to consider.
However, the net worth requirement of $1,000,000 and liquid cash requirement of $500,000 might not be affordable for some. In which case you can consider some of the other franchise options that Vetted Biz has covered.
The financial statements show that although overall revenues increased in 2020, so did costs by a larger amount. Leading to a lower net profit than the previous year.
The cash and cash equivalents at the end of 2020 were $2,496,527. With the net cash decrease over the year increasing only slightly.
Overall, Zaxby’s seems like a good investment option for potential franchise owners, looking for a potential franchise investment in the Food and Beverage Industry.
