Intro to the Subway Franchise
Franchising is a popular method for expanding business. Through a licensing relationship a franchisor, or business owner, essentially sells a franchisee the rights to open a new business location. For instance, the Subway franchise has many locations, all of which were sold to various franchisees across the country. Once the Subway franchise finds a franchisee, the company grants them the right to build their own location using preexisting systems, regulations, etc.
Franchising is an attractive business model for anyone new (or not) to the industry. Unlike an independent business, which requires growing from the ground up, a franchise comes with a pre-established, and usually successful, operational system. Through extensive training programs, franchisees learn all the ropes behind the business, eliminating the daunting trial and error process. Not to mention, a franchise comes with brand recognition is built right in.
FRANCHISING IS AN ATTRACTIVE BUSINESS MODEL FOR ANYONE NEW TO THE INDUSTRY.
Anyone looking to purchase a franchise will be given a Franchise Disclosure Document (FDD). It’s imperative that any franchisee fully understand the components and contents in any business’ FDD. Consisting of 23 different parts, the FDD, a legally mandated document, outlines different key pieces of information involved in franchise purchase. For instance, a Franchise Disclosure Document tells the interested franchisee more about the total fees and costs associated with purchasing the franchise of their choice.
The overall intention of the document is transparency. Both the company and franchisee need to be on the same wavelength in order for the purchase and future management of the business to run smoothly. Click here to see a more in-depth description and analysis of the Franchise Disclosure Document.
The Story Behind the Subway Franchise
Subway began more than 50 years ago with Dr. Peter Buck and a Fred DeLuca who was, at the time, a college kid. A franchise that now makes billions of dollars every year was actually founded by a 17-year-old who asked Buck, a family friend, for a $1,000.
Buck was a nuclear physicist who gave Fred DeLuca, then a college student, the idea to open a submarine sandwich shop to help him pay his tuition. Buck gave DeLuca a $1000 initial investment, which symbolized the beginning of a business relationship that changed the landscape of the fast food industry.
The first Subway location, then named “Pete’s Super Submarines,” was opened in Bridgeport, Connecticut, serving fresh and affordable sandwiches. On the first day of opening, the two sold 312 sandwiches, which cost 49 to 69 cents. While the brand has largely developed and grown over the decades, the core principle of Subway have remained the same. Among Subway’s primary principles is a devotion to providing exceptional service, high quality and affordable menu options, and a drive to keep operating costs low, ensuring great systems that never stop improving.
Pete’s Subway grew rapidly and became the Subway franchise we recognize today. By 1974, Buck and DeLuca owned 16 different submarine sandwich shops throughout the state. However, the two realized that, as a duo, they would not be able to expand with enough efficiency to meet popular demand. This is when the team decided to begin franchising, planning to meet a thirty-two-store goal. Once they began franchising, DeLuca and Buck launched the SUBWAY® brand. The first Subway franchise was opened in Wallingford, Connecticut. Franchising the business brought remarkable growth which has continued over the years.
Today, the Subway franchise system is the largest sub sandwich chain in the world with more than 40,000 different locations across the world. For people seeking a quick, nutritious meal, Subway has become a go-to for the whole family.
Franchise Disclosure Document (FDD) Summary
Franchising Since 1974
Peter Buck, Director.
Liz DeLuca, Director.
Suzanne Greco, President of FWH; Chief Executive Officer, President, and Director of DAI.
Jonathan DeLuca, Director of DAI; Director and Secretary of SIP.
Christopher Buck, Director of DAI; Director and Treasurer of SIP.
Curtis DiPasqua, Director.
David Pfanzelter, Director.
Sandy Maple, Director.
- Initial Subway Franchise Fee: $15,000
- Reduced Subway Franchise Fee: $7,500
May qualify for reduced fee if:
- Additional Franchise Purchase
- Initial Franchise Fee for affiliate company Subway franchise owners
- Initial franchise fee for franchise owners at same site of over 50 system
- Honorably discharged veterans of US armed forces
- Add-on Fee (added to reduced franchise fee: $3,750
- Satellite Franchise Fee: $5,000
- Short term satellite Franchise Fee: $1,000
- School lunch program Franchise Fee: $0
- Community development program Franchise Fee: $0
Financing the Subway Franchise
|Item Financed||Source||Down Payment||Amount Financed||Term||Interest Rate|
|Equipment Lease||Franchisor||10% of equipment cost as security deposit.||Approx. $75,000 to $150,000||60 months||N/A|
|Franchise Fee||Franchisor||$5,000||$10,000||42 months/ 182 wks||12% first 6 months/26 wks; $76.41 per wk last 156 wks.|
|Leased Space||Designated affiliate||Approx $2,000 to $10,000||Varies||Varies||N/A|
|Construction Program||Affiliate||$25,000||Varies||240 months||N/A|
|Technology Enhancement Fee||Franchisor or affiliate||None||$1,500||60 months||6%|
Training and Assistance for a Subway Franchise
All individuals that sign the Franchise Agreement as franchisees must attend and fully complete Subway’s two week long Worldwide Training Program. The franchisor recommends that franchisees schedule their training sessions close in time to the anticipated opening of their location.
Franchisees may request that their store managers accompany them to the training program. Any managers that attend this program receive a certificate from the franchisor indicating they attended as a non-owner. The addition of a manager is associated with a fee of $7,500.
For franchisees, the training program is provided for no additional charge but they are responsible for all personal expenses at the time of the program. These expenses often include lodging, meals, and transportation costs. Furthermore, the franchisor charges a cancellation fee if the franchisee fails to attend their scheduled training or if the franchisee cancels their registration within less than ten days notice.
In certain instances, franchisees may be exempt from training. Franchisees may be exempt if:
- They are a current franchisee purchasing an additional Subway restaurant
- They are a former Subway franchisee and have previously completed the program
- If they are purchasing their first Subway but have successfully completed the program less than 2 years ago after serving as a director or manager.
In order to be exempt from the training program, given they meet one of the above mentioned precursors, franchisees must apply for exemption.
The training program also has a classroom portion in Connecticut, which prospective franchisees are expected to attend. A new round of classroom training programs begins every two weeks. The classroom program consists of 54 training hours, in addition to 33 hours of on-the-job training at nearby Subway locations.
The franchisor also issues each new franchisee a copy of the confidential Operations Manual in either physical or electronic form. Throughout the franchisee’s experience running their Subway, they may receive updated copies of this manual. While prospective franchisees are not typically given a copy of this manual, they are often permitted to inspect the manual when working with the franchisor prior to signing the Franchise Agreement.
The Franchise Agreement does not include an exclusive territory. The franchisor might grant the prospective franchisee exclusivity rights under the company’s Exclusive Area Development Program.
Under the Exclusive Area Agreement, the franchisor promises exclusive right to a certain territory to the franchisee. Site development is expected to follow the franchisor’s site review procedures. Additionally, the ranchisor reserves the right to develop special locations and opportunities directly if they are unable to offer an appropriate exclusive location.
If the franchisor grants the franchisee limited exclusivity rights to an area, the ownership of existing franchises in the territory will not be influenced by the new status. Furthermore, the franchisor will waive any transfer fees if an existing franchisee within the designated territory chooses to transfer their restaurant.
If a prospective franchisee wants to change the location of their restaurant, they must obtain written consent from the franchisor.
Term of Agreement and Renewal
The length of the franchise term for a Subway restaurant is 20 years but the franchisee must sign a sublease or sublicense within two years of franchise purchase or franchise termination. Furthermore, the franchise automatically renews for additional 20 year periods unless either party decides against renewal and sends written notice at least 6 months prior to expiration of the Franchise Agreement.
Restrictions on Sources of Products and Services
All franchisees must operate their restaurant in compliance with all methods, procedures, standards, and specifications of the franchisor, as outlined in the operational manual and any other forms. Any Subway restaurant premises may only be used for the operation of the Subway restaurant. Operation or sale of any other services or goods requires prior written consent.
Franchisees must offer all goods and services the franchisor designates as required for all franchisees. Each Subway location must, at the least minimum, offer the basic Subway menu and any additional menu items must be approved by the franchisor.
The franchisor has adopted the Marketwide Option Program (MOP) and Store Option Program (SOP) to promote consistency of items offered for sale.
- All prospective Subway franchisees must complete initial training at times and locations the franchisor designates within the Franchise Agreement.
- The franchisor must also approve the desired location of the restaurant. The franchise agreement states that both the franchisee and franchisor must agree upon a single location. It is the franchisee’s obligation to find a location. If the desired location is not within the granted territory, they must submit a location approval request describing the proposed location. The franchisor will then either approve or reject the proposition. Subway guarantees its franchisees that it will not unreasonably reject a proposed location. The company evaluates site factors such as proximity to strong population back-ups, visibility, and parking.
- Negotiation of the lease, sublease, license, or sublicense with affiliate leasing company. Once the franchisee signs the Intent to Sublease/Intent to Sublicense, the affiliate assists the franchisee in negotiating the lease or sublease for the restaurant and will sign with the landlord.
- Franchisee must meet the franchisor’s specifications for the layout, design, and equipment for the restaurant. These details are outlined further in the Franchise Agreement.
- The franchisee is provided with a Development Agent they may consult for guidance.
- The franchisee is provided with an Operations Manual and other materials for the operation of their Subway location.
At the end of 2017, the Subway franchise had 25,908 total franchised units across the country.
Initial Investment Costs
|Name of Fee||Low||High|
|Initial Franchise Fee||$15,000||$15,000|
|Equipment Lease Security Deposit||$7,500||$15,500|
|Training Expenses (including travel and lodging)||$2,500||$4,500|
|Legal and Accounting||$1,000||$3,500|
|Grand Opening Advertising||$2,500||$4,000|
|Miscellaneous Expenses (business licenses, utility deposits, and small equipment)||$4,000||$8,000|