Subway clamps down on franchisees as chain eyes $8B sale: sources

Subway is putting the squeeze on its franchise owners to shore up sales and profits as the struggling sandwich giant attempts to reel in a buyer, The Post has learned.

The nation’s largest fast-food chain is pitching private equity firms on a prospective sale by showing them revenue and earnings that imply the company could be worth more than $8 billion, two sources with direct knowledge of the process said.

Privately owned Subway claims last year it had between $650 million and $750 million in Ebitda, or earnings before interest, taxes, depreciation, and amortization, sources close to the talks said. Accordingly, bids are expected to come in between 10 and 12 times that, resulting in a price tag of $7 billion to $8.4 billion, one source said.

To make its numbers, however, sources say Subway has meanwhile begun forcing owners to foot the bill for expensive store upgrades, even as it has begun to scrap fees for prospective owners. The chain is also clamping down on those who are looking to close money-losing locations.

One longtime franchisee in the East Coast with more than a dozen Subway stores recently wanted to shut down two unprofitable stores. Normally, that wouldn’t be a problem since his five-year options to renew the licenses were expiring, the franchisee said.

Instead, Subway changed its policy on expiring leases, telling him he would have to sell all his restaurants — including the profitable ones, the frustrated franchisee alleged. 

“Now they say you can’t take your options,” he said, requesting anonymity. “If you walk away they charge average royalties you earned per month over the last three years for the length of the [20-year] agreement.”

Franchisees are even responsible for lease payments unless a money-losing store is resold, he added. If franchisees do decide to sell, they can realistically only use the company’s self-appointed broker ReInvest Capital, as all sales need to be approved by Subway, sources said.

“They are going to have you sell a store that was worth $200,000 to $400,000 for $100,000,” a West Coast franchisee told The Post.

A Subway spokesperson declined comment.

According to sources, Subway wants to consolidate ownership under a few large operators and shift away from the majority of mom-and-pop owners, many of whom are immigrants. ReInvest is touting large blocks of Subway restaurants on its Instagram page,  including a 74-restaurant Carolinas package and a 91-store deal in Florida.

“They are cleaning house and making the brand presentable to a big investment firm,” the West Coast franchisee said.

To attract buyers at new locations, Subway has waived the $12,500 franchise fee, according to internal documents. Existing stores are being sold for very cheap prices, franchisees said.

“Someone just got two Subways for $1 a store and they have a year to remodel,” the East Coast franchisee said. “This is an all-out assault by the corporation.”

Current Subway owners must also invest thousands of dollars in mandated upgrades or face fines – or even lose their stores with no compensation. In addition to store renovations that are due in 2024, Subway is requiring operators in the next few weeks to buy new $5,000 ovens and $6,250 toasters if the current models are more than four years old, along with new digital cash registers.

Last month, the chain rolled out a plan to add meat slicers, ostensibly to give shoppers the impression that the deli meats are fresh like at fast-growing rival Jersey Mike. Although the slicers are free, the franchisee will need to pay more in workers’ compensation insurance to operate them, the franchisees said.

“They want us to invest the money in the stores now before an investment company comes in and needs to spend the money,” the West Coast operator said. 

Subway’s sales, meanwhile, are underwhelming. The East Coast franchisee said sales are a bit higher, mostly due to increased prices, but are still half off their peak.

“Sales are stagnant, if anything they are 1% to 3% higher,” the West Coast franchisee said.

Subway, which owns none of the chain’s roughly 20,000 US restaurants and relies on franchisees to pay an 8% gross royalty fee, said sales rose 7.8% last year compared with 2021, exceeding its projections by more than $700 million.

Publicly traded rivals like Restaurant Brands, which owns Burger King, trade at 16 times Ebitda – so buyers are in for a windfall if they take Subway public, the thinking goes for a lower multiple. Opening bids are expected next week. Still, one prospective private-equity bidder noted that chains like Restaurant Brands are showing unit growth, while Subway is not.

“The first question is there is no unit growth in the US and the second is what is the stabilized level of earnings,” the investor told The Post.

Nearly a quarter of all Subway franchises have closed their doors between 2015 and 2021 as the company loses market share to rivals like Jersey Mike’s, according to public records. Nevertheless, there are still more than 20,000 US Subway restaurants. The number keeps decreasing while, by comparison, there are about 13,000 McDonald’s.

The unit growth, the private equity source believes, has to come from international openings.

Subway is saying in its pitch materials that sales per store were down 2% from 2010 through 2020 but have risen the last two years so they are now at the same level as they were in 2012, the private equity source said. Inflation, meanwhile, over the last 10 years has grown more than 20%.

“This is a real operational lift,” the private equity source said.