I'm doing 2 business plans (which I hate might I add) both for separate clients wanting to buy a subway outlet. But the margins are so tight and franchise fees so high that although they seem profitable enough, cash-flow is a disaster. We cannot seem to pull our business plans out of a downward slope. Big prob seems to be quarterly vat. Anyone got experience with subway model?
Thanks
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Watch current VAT rules
The recent ruling regarding the imposition of VAT on the majority (*) of sales made (because majority of sales being heated food) unsurprisingly affects viability in a serious way.
Being a franchise operation it's a tough call anyway to make a decent living even before this latest extra VAT cost imposition.
Franchisees therefore need to get together and use collective bargaining power to try and reduce fees paid to head office and / or get head office to agree to improved marketing and increased retail prices.
(*) A recent post on AWeb referred to HMRC issuing a letter to Subway franchises stating that HMRC expected that standard rated sales from Subway outlets to now be at least a certain figure (87% from memory).
We used to have a client that owned 4 Subway franchises - £1m turnover. pa. The model just didn't appear to work and they went into liquidation. As you've already stated the royalties and other contributions required are high, restrictions on buying food from specific suppliers, VAT it all adds up and it seems the only way to make a modest profit is to actually work in the shops themselves.
We also have contact with a local insolvency practitoner and he has also seen a few of these Subway franchises go bust.
I haven't actually met a franchisor that has been successful with Subway, although I'm sure there must be?!
Hmmm that's what I feared
I feel like I should tell them to run a mile but they seem dead set on the idea.
Thanks for your comments
Subway Appeals
The further problem with Subway is the uncertainty. The Upper Tier has just found against them, and there is an Appeal to either the Court of Appeal or the ECJ. This adds at least two years to the process, before there is any real certainty as to the VAT liability of their main product line. Anybody going into the franchise must be aware of this matter, and take appropriate advice.
If they are buying an existing business, then do protect them against historic assessments.
Don't let them do it as a sole trader
or give personal guarantees.
Franchising is an excellent method for the extraction of redundancy payments and inherited wealth from fools and passing it to the franchisor and associated advisors and banks.
Just like taking on a pub!
Chris Smail - www.langer.co.uk
Buy a job
Franchising is an excellent method for the extraction of redundancy payments and inherited wealth
I agree with the above - from what I have seen, franchising is a way for somebody to buy themselves a job wrapped up in the modern day spin rather than an opportunity to develop their own business and to significantly benefit financially.
The majority of franchises seem to be "lifestyle" type level businesses - although there must be franchisees out there who have been very successful ?.
So ...
... presumably Subway is making a massive loss from these extortionate franchise fees and paying no UK CT?
yes...
apparently they are unable to turn a profit from the £200,000 they 'charge'....but i guess that is because the intelectual property costs incurred are.....hmmm lets see....around £200k per franchise....this is paid over to the head office and owner of the brand....in outer mongolia.....(now i wonder if the MD lives their?)