In the small business industry, many entrepreneurs favor franchise ownership over starting unique businesses. With franchise ownership, franchisee entrepreneurs gain the benefit of licensing an established business's procedures and processes from the franchisor. These licensing benefits give the business owner numerous advantages, including an association with an established business and the benefits of an already established branding strategy.
In the fast food industry, Subway is an extremely well-established licensor of its sandwich stores. In fact, Subway is the largest fast food company in the world in terms of store count. It is one of the most popular businesses to franchise and is also known to have among the lowest franchising costs. For 2020, it is ranked #107 on Entrepreneur Magazine's "Franchise 500 Ranking."
Subway: An Overview
Subway has a long history in the fast food business. It is a privately owned company that opened its first restaurant in Connecticut by founder Fred DeLuca in 1965 under the name "Peter's Super Submarines." Its deep roots have allowed the company to build a strong strategic brand around its sandwiches and the overall fast food experience. Between 2013 and 2017, the company was growing aggressively. This growth has helped the total store count increase worldwide to 41,600 as of 2019.
The Cost of Franchising a Subway Restaurant
One of the leading selling points for a Subway sandwich shop is the low cost of opening a franchise. As the first step in opening a franchise operation, the franchisee is typically required to identify a store site and pay the initial costs. Initial costs for a store site include its real estate and construction expenses. For a Subway business, it is estimated the total cost for the initial restaurant site ranges from $150,050 to $342,400, much lower than other competing fast food franchises.
Other costs are involved in franchising the business. An initial startup licensing fee of $15,000 is required to begin the business, compared with a $40,000 to $90,000 licensing fee for Dunkin' (DNKN) or the $45,000 fee that Mcdonald's (MCD) charges. Annually, royalty fees are also required. Subway royalty fees are 8% of annual gross sales, which are higher than the 5% and 4% that Dunkin' and Mcdonald's charge, respectively. Additionally, the franchisee is required to pay an ad fund fee that is 4.5% of total gross sales.
The Procedure for Franchising a Subway Restaurant
An in-depth due diligence process is required for a franchise, and the franchisee must pass a number of specific requirements before entering into a full licensing agreement with a Subway franchisor. The first step for a Subway franchise entrepreneur is typically getting the business site approved. This requires detailed market research and is also where a large amount of the franchisee’s capital is invested. Beyond gaining approval of a Subway business site, the franchisee entrepreneur must also have a specified net worth between $80,000 and $310,000. A liquid cash requirement is also typically involved with opening a franchise, and the requirement for a Subway franchisee ranges from $30,000 to $90,000.
Upon gaining site approval and passing the capital requirements, next the franchisee enters into a licensing agreement with the franchisor. One of the greatest benefits of a franchised business is the ability to gain use of the company’s operational procedures, trademark rights, and branding. With these licensed business advantages, franchisees can primarily rely on the established marketing of the franchised business for its sales.
The Sales From a Subway Franchise
Subway sandwiches and the Subway business are both well-known, which helps Subway be a leading revenue producer in the fast food sandwich industry. As of the latest available figures from 2018, Subway had sales of $10.4 billion.
The Bottom Line
With the benefits of an established business, low startup costs, and parent company support, a Subway franchise is a good option for entrepreneurs interested in opening a franchise business.