Franchising a chain of Subways

[TStoneMBD]

This question may seem relatively unanswerable considering there are so many variables to consider and I wouldn't expect anyone here to very accurately estimate what I'm asking, but please humor me for the sake of discussion.

Say for instance that our hero in question has $150,000 in cash and no assets. He has earned income that pays his expenses and if his expenses go up, his income goes up to match his expenses precisely. However, his earned income never adds to his networth, its only enough to pay his expenses.

Our hero wants to open up a Subway. It doesn't matter where his location is for this exercise, our hero is going to try to build the most profitable Subway that he can while trying to guarantee longevity even if it means he moves out of state or builds Subways in entirely different states. He will not be purchasing the real estate, he will only be renting at least until he starts turning large profits and needs to reinvest that money. He is going to tend his first Subway 40 hours a week for 4 months or so at which point he will hire a manager to handle everything under the sun that goes wrong with the place including employees, security, orders, etc. Our hero is going to purchase a security system to make sure that everything works properly and that there is minimal theft.

Hero's intent is to open as many Subways as possible in the quickest amount of time by borrowing against each of his successful Subway stores as they flourish along with reinvesting any profits. Managers will be managing each Subway store and hero will not have to be involed whatsoever unless a major event occurs. He is trying to turn his original $150,000 stake into 1 million dollars net worth through the sole means of equity and profit build in his business.

How long will it take to build a 1 million dollar net worth and what is his likelyhood of success?

An easier question to answer might be what is a fair estimated yearly profit margin for a single Subway store after that store has been established for 5 years? On a Subway store that has all of its debt paid off, what can we expect its rate of return to be in comparison to the store's estimated sell value?

[Sniper]

http://www.subway.com/subwayroot/Development/05dev/brochure/docs/fsb_english.pdf


http://www.franchisevideosonline.com/html/subway_franchise_video_pv.html



Total investment = 70K - 220K (Avg 150K)
Franchise Fee = 12.5K
Royalty Fee = 8%
Shared Advertising Fee = 3%-4%
Number of employees needed to run franchised unit: 2-3FT, 6-10 PT
Space Required: 300-2,000 SF

Absentee ownership of franchise is NOT allowed. (100% of current franchisees are owner/operators)

Have you requested the Subways Uniform Franchise Offering Circular?

[Sniper]

Based on a quick search of bus for sale, you are probably looking at sales of 100-500K/yr and profits of less than 100K/yr (25% of gross) for an established business. With a sale value after 5-10 yrs of 2-3x net.

[midas]

Hero:

Subways are everywhere and the barriers to entry of owning a low-end sandwich shop are next to nothing. Hero should research some up and coming fast food concepts and invest his $$$ wisely.

[Sniper]

[ QUOTE ]
He has earned income that pays his expenses and if his expenses go up, his income goes up to match his expenses precisely. However, his earned income never adds to his networth, its only enough to pay his expenses.


[/ QUOTE ]

This would also be a red flag as to the ability to successfully manage a business.

[savman]

i agree with the other poster. besides barrier to entry etc. market saturation should be a consideration with this franchise. there are something like a bajillion subways and in my small town alone there are three with another slated for opening soon. lot of market share overlap, not to mention competion from other sub shops. as other poster suggested i would try a franchise less prolific. it is better to run three rest. with healthy profit margin, than 10 with razor thin profit margins imo. it depends on where u are geographically but i have two suggestions. chick fil A is a great rest. and will soon be all over the US. i know some people who own a few of them and they are supposedly awesome franchises. another is Moes burritoes. FWIW might be the best sheeeeet ever. i dont know if they have franchised outside southeast or not, but they are far from saturated here. also, i think they require u committ to opening up three if u open up one. just my thoughts.

[MaxPower]

About 6 years ago there was an expose in Forbes or Fortune (or one of those business magazines) about Subway. Subway had some very bad policies regarding their franchises that made it difficult for the franchises to do well.

A lot has changed for Subway in 6 years. They are now a major player in the fast food industry. Maybe things have changed for the franchisees but I would be very carefull about it.

[DesertCat]

[ QUOTE ]

Hero's intent is to open as many Subways as possible in the quickest amount of time by borrowing against each of his successful Subway stores

[/ QUOTE ]

Who loans money against Subway franchises that don't even own their own real estate?

I would bet that any loans you could get would be for a fraction of true value and at very high interest rates. I say this because if I was the investor making the loan, I'd have to protect my loans against the possibility that you stop running the franchise profitably, or that it gets revoked by the parent corp if you break any rules.

Are the franchises easily transferable/salable? What would be the investor's collatoral?

[TStoneMBD]

[ QUOTE ]
[ QUOTE ]
He has earned income that pays his expenses and if his expenses go up, his income goes up to match his expenses precisely. However, his earned income never adds to his networth, its only enough to pay his expenses.


[/ QUOTE ]

This would also be a red flag as to the ability to successfully manage a business.

[/ QUOTE ]

i said that hero is only making enough money to manage his expenses because i didnt want his personal income to be factored into him million dollar networth nor did i want it to be considered when reinvesting in another business. hero is doing just fine for himself.

[TStoneMBD]

i agree that subway seems to be a poor franchise. i really dont know enough about the franchise market to determine which franchises are the best, all i know is that subway is still the #1 franchise to build according to franchise500. quiznos is #3 and to be honest, i find quiznos to be a much better sandwich company because their subs are frankly better. does that mean they are more profitable? how the hell should i know. although if i was going to start franchising, i would certainly research which franchise is the correct one for me before diving into subway.

[TStoneMBD]

the idea is that hero has 150k and wants to open up a subway. he is going to apply for all loans at reasonable rates. as the subway starts turning profits, the loans will be getting paid off, or hero will be pocketing the money. the profits from the subway will be opening up new subways. once the subway is established and has a strong client base, it will have sell value to other entrepeneurs. if i have 40k in debt and the subway is worth 150k, i should be able to borrow 110k against it, or whatever the acceptable LTV is for my credit rating. i read that around 66% of subway store owners have more than 1 subway store. there are many people who started before having a million in networth and now own 10+ subway stores in a short period of time. is franchising really this profitable or is there something i am missing?

[cockandbull]

there was an article in the guardian or observer recently regarding the pitfalls of "subway" as a business. I havent got the time to look it up for you, but if you wish to search the article may still be avavible. Both are UK national newspapers.

[DesertCat]

[ QUOTE ]
the idea is that hero has 150k and wants to open up a subway. he is going to apply for all loans at reasonable rates. ... if i have 40k in debt and the subway is worth 150k, i should be able to borrow 110k against it, or whatever the acceptable LTV is for my credit rating. ...there are many people who started before having a million in networth and now own 10+ subway stores in a short period of time. is franchising really this profitable or is there something i am missing?

[/ QUOTE ]

I'm not sure you are missing anything, I may be more confused than you. You really need to dig into the Subway franchise documents and marketing materials to better understand how the process works. Also, you should interview a couple franchisee's, they'll fill in the blanks that the parent company might not want to. Subway itself may have a program to loan you money, but let's assume they don't.

When you talk about LTV, you are talking loan to value. That makes sense for a house, because a house can be resold easily, it has an easily realizable value to your investor. I'm not sure how "easily realizable" a subway franchise value is.

If they are easy to sell at full value, then you shouldn't have problems getting loans. If it takes forever to sell one and it's unclear how much it's going to be worth when it does sell, well, then it's going to be difficult to get a loan since your investor won't have any collateral they can count on.

My bet is that unless Subway is loaning you money themselves, your loans may have to be "personal loans" i.e. secured by your income and reputation. The problem is that a bank might treat your earning power from a new franchise as speculative, so you won't be able to increase your borrowing very quickly.

For example, I've been self employed for a little over two years. Banks look at my last 2-3 years of tax records to determine my income. My first year I made a ton of money and used that as an opportunity to take a large investment loss from my previous career, saving me a great deal in taxes, but making it also look like I didn't make much that year. It's still hurting me today. This year I'm making more than ever, which means nothing to the bank until I file my returns next April 15th. So in effect it's going to take me three years to increase my borrowing power.

In your case you'll be losing money every time you open new franchises, for at least a short while. This is going to hurt your reportable income until the new franchises get going.

To borrow more money you'll need an understanding investor or bank officer who can look past your reported net income, to what's really happening in your businesses. They exist, but you better start laying the groundwork early. Don't just assume people are going to beat a path to your door to give you more cash when you need it.

[TStoneMBD]

thanks for the insight dc.

some things you should know:

subway does have their own loaning program and will loan money to investors wanting to open a subway store.

subway has 3rd party investors that will also loan you money to open a subway store.

from my understanding, subway stores have such a huge success rate that 3rd party investors will loan money to a large group of subway investors as long as they have a strong business plan and have good credit.

subway financing information (http://www.entrepreneur.com/franzone/details/0,5885,12-12---282839-1,00.html?section=costs)

apparently all franchise fees, startup costs and equipment can be financed. it says that startup costs can be financed through a third party, which i believe means its a third party investor sponsored by subway. there is a large list of subway investors interested in lending money to potential entrepeneurs.

[TStoneMBD]

[ QUOTE ]
Absentee ownership of franchise is NOT allowed. (100% of current franchisees are owner/operators)


[/ QUOTE ]

what exactly does this mean? what is an absentee ownership? you cannot hire managers to run the business? if a subway franchise owner owns 10 subway franchises he has to be there to manage all 10 subways at all times?

[Sniper]

[ QUOTE ]
what exactly does this mean? what is an absentee ownership? you cannot hire managers to run the business? if a subway franchise owner owns 10 subway franchises he has to be there to manage all 10 subways at all times?

[/ QUOTE ]

It likely means that you have to put in a certain number of hours at each store. You should request their offering information, simple request on their website, as that document most likely discusses this in more detail.

You might also find this article of interest...
http://moneycentral.msn.com/articles/banking/basics/10768.asp