Subway Franchise - How Much Can I Make As a Franchisee?
The most common question that people email me about or post on my blog is "how much money will i make as a Subway franchisee?" Umm...not much?
Question: I'm trying to determine exactly how much money I can make with a Subway franchise company, but I'm having trouble getting Subway corporate to answer this question. Every time I bring it up, they avoid the topic and mention something about the FTC having rules against sharing this information. Can this be right? How am I supposed to get this information? What is a reasonable level of income to expect from a Subway franchise?
Answer: This is one of the real quandaries of investigating most franchises. You're not about to invest until you know how much you can earn; the franchisor probably has the best data to answer this question accurately, but they usually won't tell you a thing. I agree it doesn't make much sense when you look at it this way.
The early history of franchise sales in the United States contained many instances of abuse when unjustified or misleading earnings claims were used to sell franchises. In 1979, Congress passed legislation authorizing the FTC to regulate the franchise industry to try to stop any such bad practices.
The current FTC rules does not forbid Subway franchise from supplying information about the earnings that can be achieved in their business. They do, however, have stringent rules on how this information can be given to a prospective franchisee.
Basically, any franchise that wants to provide this information must put it in writing in their UFOC disclosure document. It is essential for the franchisor to make sure that the data provided is as accurate and representative as possible, and they need to clearly label any assumptions or qualifications on the data provided.
Assuming they meet these two requirements, they are free to provide whatever franchise earnings information they want to a prospective franchisee in terms of sales, expenses, cash flow and income. Since it's this easy, it begs the question of why more franchisors don't do it.
The answer is twofold. First, producing an earnings claim does involve effort and expense for the Subway Franchise system. Second, the results (given that they have to be accurate and not misleading) may not be attractive enough to assist in the recruiting of new franchisees. If that's the case, having the FTC to hide behind gives franchisors a ready excuse to keep this accurate data from prospective franchisees.
Whether Subway corporate provides earnings information or not, you'll want to confirm this data in conversations with existing franchisees of the system. Call them and ask. Make sure you select enough franchisees at random to get a clear idea of the averages and ranges for earnings in the system. You also ask about a reasonable level of earnings for a Subway franchise business. I think most experts would answer this question relative to the amount of the total investment required by the franchise. You would probably expect the income to increase as the investment required by the franchise increases, though this is often not the case in franchising.
A good rule of thumb is that you can earn 10 to 15 percent on your money over time in a totally passive investment. Since most Subway franchises require you invest your time as well as your money, you should expect a return significantly higher than this level in order to justify the investment. This higher return will also offset the higher risk involved in this type of investment. You can consider earnings of at least 30 percent of your total investment on an annual basis as a reasonable return, and expect to reach this level, at the latest, by the third year of operation of the business.
I think we all agree that getting a realistic estimate of earnings is required before investing in any business. I would respond to this question in several ways:
1) building a new location is like playing roulette, first you put your money down on a single number (your location), then you wait a really really long time, and you either get a payout or you don't. It's a very dangerous game, and one that I recommend against for newbies.
2) You buy an existing location. Also a dangerous game, but the odds can definitely be tilted if you know the following secrets - a: review the WISRs for the past year - that's your top line, and since Uncle Fred is tougher than Uncle Sam, the sales numbers on the WISR are pretty reliable. If a seller is telling you he is taking money off the top, don't believe it, or don't factor that in; b: audit the actual invoices from the distributor and Coca-Cola for the past year to determine actual cost of goods, c: for your fixed costs, review the lease to understand monthly rent and CAM and any escalations, plus review all the utility bills (electric, gas, water, garbage, pest control, security, alarm, telephone, internet provider, Private Label Radio, and soon in-store TV service), plus insurance, licenses, permits, office supplies, and credit card charges; d: add additional expenses for equipment repair and local store marketing; e: VERY IMPORTANT. No "Rule of Thumb" for labor costs, and do not go with owner's numbers. For labor costs, build a 7 day schedule with the amount of people required on the floor, multiplied by the hourly rate the buyer will have to pay. The seller may be working 60 hours a week in the store, or working nothing and and he or she may be using family who may or may not be paid through payroll. Of course, add workers comp and all the employer taxes. When you subtract these costs from the store sales, you get a decent idea of the net income, not including any depreciation and not including any finance costs.
3) Do not use any "Rule of Thumb" to estimate earnings potential for the particular location being reviewed. Food costs can vary widely based on customer demographic patterns, labor is dependent on local market conditions, and occupancy costs (lease + utilities) can also vary all over the map. The only rule of thumb I use is that the lease cost (rent + CAM) should be no more than 2 days of sales.
-From (multi-unit) Mark at www.yourfranchisementor.com
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Interesting answer to the profitability question. Subway Corporate can easily give earnings figures , but "Chooses not to " as they don' have to. Besides it would open them up to legal challenges.
Your response regarding the profits is where I differ with you.
Your return on investment depends on your cash down payment, and also depends on whether you calculate before or after debt service, after all you are building equity as you pay off debt.
My formula is 10-22% on DA average sales for the territory, assuming again that you are an owner operator of the store .
Sales is the real driver for he ROI calculation
Regards
fayaz Karim , 20 yrs with Subway
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"Your return on investment depends on your cash down payment,". No, it does not. In the end, all that matters is how much you financed, whether or not that is money you loaned, or not. Of course, the WACC (Weighted Average Cost of Capital) will differ depending on whether it's your own money or it's money that was loaned, but in the end, it's not like you can forget about the money you put down as a downpayment: that money needs to return a revenue as well (!)
I understand where the author is going to with the 30%, I agree the way he divides it (your hours that need to be paid and next the cost of capital that also need to be paid), but I dunno if the 30% is high enough: after all, it's SW, so the risk is extremely high
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Your return should be based on your own intial investment
Factor all these into the return.
-build up in equity with debt fulfillment
-actual profit per year
-appreciation in value of store
Problem is , this calc should be done after say 5 yrs. If all goes well, yu can get a good return before you "burn out" of the Subway franchise system.
It also depends on whethher this is your first store or 5th store, ROI changes according to the owner and his own debt structure. Makes an intersting discussion for sn MBA class....
Fayaz Karim MBA !!!
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Thank you for this great information. I am/was considering purchasing a Subway Franchise. In doing my franchise research, I am finding so many unhappy subway franchisees and restaurant owners. Not sure at this point where to turn. But, I think I'm going to hold off on purchasing my subway franchise, that's for sure!
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SHORT VERSION:
Somewhere between poor and broke!
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I totally agree with Mark Lenoard’s answer. I would suggest that as a newbie, you should look into existing stores whose sale is not high (over $6000). Reason being, very high volume store are hard to manage. You need to look at certain things before buying a store.
(1) Weekly sales: This is most important figure and you should find this out from the combo report. Every Subway owners receives combo reports from Headquaters every week. This is key figure. Here is my rule of thumb. Weekly sale is your monthly income after taxes. So, if weekly sale is $5000 then your monthly profit margin should be equivalent to $5000 or close to that margin as long as you keep your food and labor cost in control.
(2) Food Cost: All restaurant owners tries to keep their food cost below 30%. It’s feasible as long as you train your employees the “right way”. Tell them NOT to put extra food items on the subs (unless customer demands), make sure they tell the person who is handing register about the double meat and double cheese. Only two napkins go with foot long and one napkin with six inch. NO FREE FOOD OR DRINKS to their friends who comes to store. They must use same cups for drinking instead of using new ones every day. Stuff like that contributes highly in food cost. As an owner, you need to take charge of that and train your employees. If you will do so, then your food cost will come around 25% to 28%.
(3) Labor Cost: I would try to keep my labor cost around 25% as well. Key here is managers. I try NOT to keep managers in my store. Because, once they get manager title they try to ignore the owner and run the store their way. I promote my ongoing staff’s honest/hard working (which is VERY HARD TO FIND) member to the “team lead” position and grant them salary (no more than 26k a year). But, once they are promoted to salaried wages, they are required to work over 50 hours a week. Also, they need to keep food cost and labor cost in control. Keep two of them shift leaders and train them the same way.
Above three are the major factors in running a store. Next one would be the rent, lease and location. You will need to make sure that rent is reasonable in particular location. Also, you need to make sure that lease is there for a long term and renewable. Then, you will need to review the combo report of the existing store, WISR, control sheet and profit/loss statements. I personally would not buy a store below weekly sale of $4000. With that sales figure, you will have to run as an owner/operator. Either way, if you are just entering into Subway business, then I would strongly suggest that you run the store as an owner/operator for good couple of years. Once you know the business inside/out then it will be a good idea to expand Subways and buy the other one.
Asking price of the store should be 4 times the weekly sale, another rule of thumb. So, if weekly sale is $5000 then asking price should be in the area of $200,000 to $220,000 (give and take).
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"Asking price of the store should be 4 times the weekly sale, another rule of thumb. So, if weekly sale is $5000 then asking price should be in the area of $200,000 to $220,000 (give and take)."
I Don't follow the math in this rule of thumb. 4*5000=20,000 not 200,000. Which is correct, 4 times weekly sales or 40 times weekly sales?
Thanks
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Hi Dave,
I am NOT an advocate of any simplistic "Rules of Thumb". Using these oversimplifications is a good way to get your thumbs cut off! Basing the value of a Subway store on sales is just plain wrong; the only thing that matters to you as the potential owner is how much money you can make. You have to know the rent, the utilities, the prevailing wage rates, the hours the store will be open, etc. There is a lot of analysis that needs to be done to determine the store profitability, then you make your offer based on current profits. Is that helpful?
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Dave be careful with rules of thumb as Mark says.
It is about earnings, not just sales.
I have seen so many transactions and have seen overpricing and errors in how deals are structured. Is a $5000 weekly sales store with a $5000 rental burden worth the same as a $10,000 sales store with a $5000 rent? try using a rule of thumb in that scenario and see how quickly your deal is upside down.
I do this everyday-e mail me or call me
fayazk@extremepita.com, 949-253-4610
I teach valuations and do them for several franchises; additionally I do business plans, cash flows and give second opinions. If the price of a Subway is deemed too high by the DA or Franchisor, they require a letter from an accountant or Lawyer saying the price is OK. I provide these letters in some circumstances as an accountant.
With 20 years experience behind me, can you pick my brain ??
Enjoy your journey through Subway terrtory..........
Fayaz Karim, 949-253-4610
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Hey Fayaz - your point rasied one question for me. I am going to buy the store and here are the details.
Store opened: 1989
Previous Owners: 2 (first one owned it till 2004 and other one took over)
Rent: $2000
Lease: Being renewed for next 10 years
Renovation: Not due till year 2014
Location: Good
Reason for selling: Owner went through surgery and has high paying job in private sector. Owner can't pay enough attention to this store. Subway folks are pushing on him to sell the store.
Initial Asking Price: $390,000
Final Contract Price: $300,000
With all of the above said, I brought him down to $300,000 for $10,000 weekly sale. I have been in Subway business for 3 years.
Here is the question: Subway DA asked me to give him a letter saying from my accountant that "$300,000 for this store is a resonable price!"
According to your statement, " If the price of a Subway is deemed too high by the DA or Franchisor, they require a letter from an accountant or Lawyer saying the price is OK." I am bit confused, I think that $300,000 is resonable price for this store then why DA is requiring this letter?
Second, DA also asked me to provide a letter from my bank saying that I am approved financially for a loan.
I have provided both of these letters to DA and I have been approved for this store.
But, based on above scenario do you think that $300,000 is resonalble price for this store?
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Here is my answer in several parts and briefly-I still prefer to talk, not write!
Deal looks reasonable based on facts presented above. Your DA may be concerned for your overall situation-you say you have been in Subway 3 yrs. How many stores do you have?
If the structure of your deal at 300k leaves you with too much debt service and too little cash flow, he will be concerned, quite rightly, and so should you. Because when you are upside down it will affect your performance and commitment, then he will have a moaning and groaning franchisee-and the DA had nothing to do with your condition. They are also protecting themselves from future litigation and finger pointing(you should have warned me...).
Is there another store coming nearby or contemplated soon?? DA would know this and seller needs to disclose this to you.
You said you have provided both letters to DA-then everyone should be happy.
Lastly, if the DA knows that other stores sold for less and similar details, then he may be concerned, because you are paying "above market" for that market.
For heavens sake call me ! 949-253-4610 !!
They call me from Singapore, Pakistan, Hawaii, Canada, UK.......
Fayaz
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Here is an add on response to the CPA letter question.
Some DA's are requiring it on EVERY transaction , other DA's only when they think they need one
Secondly, some DA's are requiring new buyers to take 16 Subway courses before they go for training or in the case of multi unit owners, before they get approval to own another store.
Go figure.........
fayaz Karim, 949-253-4610
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But, you got the idea. Things like this won’t be covered in the Subway training or DA office. You will only learn it from existing owners who are willing to share their knowledge. But, you got the idea. Things like this won’t be covered in the Subway training or DA office. You will only learn it from existing owners who are willing to share their knowledge. Also, you will need to make sure that Register is up to date, freezers and coolers are in good condition and things like that.
I struggled a lot when I first bought the subway, but now I enter the store and I can tell who is stealing from me and who is not. Who are good worker and who are not? There is a way to make money in Subway business, but you will need to keep close eye on your stores and make sure that above facts are covered. Granted, profit margin in Subway is not as high as McDonald’s but investment isn’t as high as McDonald’s either. Many stores shut down in a given year and many owners make a bank in a given year. It all depends on owner’s willingness to run the store.
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Hello, I am a new franchisee and I need help. I have two partners and we formed an LLC. I am only being allowed to sign the sublease as an individual but I want to operate the store using the LLC. How can I operate the store using the LLC and protect my self behind the shield of the LLC when the sublease and the Franchise are on my name? I also need to operate as an LLC because I have other partners. Can anyone help me with the experiences they have in LLC's or at least point me in the right direction?
Thanks
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Consult an attorney of law, and don't depend on free advise when it comes to these legal and fiscal matters...
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With a 10000 AUV times 52 weeks, 520,000
times 75% =390,000. I would pay the 390k for the store with the rent you are saying. You got a GREAT deal at 300K! I am in the system for 5 years now, and 65 to 80 % of yearly net sales is the normal range of sales price providing rent is 1800 to 3500 per month. In my area the higher the volume the store, the higher the percentage you will pay because ROI in much greater. Your productivity goes up which will lower you percentage of labor cost...and so on.
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That's what I thought too! Thanks
Other question...with your five years of exp in Subway field. Have you struggled with employees?
I am having hell of a time keeping up with good employees at my one store. Which is a major headche at my new 10k weekly store. All of these highschool kids leaves without even telling me or giving me two weeks notice. They just stop showing up and I figure that they quit. It's been going on for quite a long time at my current store. Which leads me to put extra hours.
I also can't afford team lead and/or manager at my current stores 6k volume after $5 footlongs.
What is the work around to this problem?
I wouldn't mind running Subways for years but major headche is to deal with employees when they stop showing up and putting time/energy in training new ones.......
Please advice!
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It is about incentives and giving them responsiilities that they enjoy-make them part of your team.Incintives-stay 90 days and I give you $50 bonus or 25 cents an hour for hours worked over 3 months....get creative to get longevity.
There are many incentives you can offer, but it can be done
Fayaz 949-253-4610
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I am interested to hear some operational Benchmarks from some actual store operations such as:
Your Opinion on operational efficiency: Poor Good Excellent Maximum
# years in Operation
Location 1: Urban Suburban
Location 2: Mall, Strip center, Stand alone
Revenue
COGS Cost of goods Sold as % of revenue
Labor Cost as % of Revenue
Size in Sq ft
Rent total w/cam
Rent as a % of Revenue
Total Overhead incl Rent as % of Revenue
EBITDA as a % of Revenue
I think this data would help those of us currently running stores as well as those who are considering it.
Keep on Selling
(I would have started a new topic for this but could not see how to do it)
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I am puzzled by the depth and breadth of this question in multi parts.
There is no "template" of general/averaged numbers, because every situation is different to the extent that your profits also depend on your prices and the mix of sales between footlongs, six inches and even your drink % which is mostly profit.
So the best way to answer the question is for you to give actual numbers and then we can estimate your projected profits based on basic assumptions
Call me to discuss.
Fayaz Karim , MBA, CA 99-253-4610
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