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Big Sandwiches Equal Big Profits at Potbelly's Sandwich Works

Potbelly Sandwich Works has created some major buzz lately in the uber competitive fast casual restaurant industry. With so many options for consumers to chose from, it's tough to come out a winner especially with the high level of brand loyalty in the sector. After witnessing the long lines outside of the 303 W. Madison St location in Chicago nearly 10 years ago (in the dead of winter!), we knew Bryant Keil was on to something.

The Potbelly’s train is firing on all cylinders and has successfully penetrated the uber-competitive fast casual sandwich sector. Potbelly sells a basic sub (PBJ, Pizza, etc) with relevant options (health, supremes) and offers an awesome dining experience. Their main target demographic is the lunch market, and their lunch lines are often out the door. Their menu includes soups, shakes and salads in addition to subs and the old-wood decor and live music make for a warm, neighborhood feel. Atmosphere is only the beginning though. Their products are well-crafted and satisfying. The quality of their ingredients is a cut above, yet price remains similar to that of their competition.

Potbelly Franchise  - Key Details

Started1977
Total Investment$456k-$768k
Initial Franchise Fee
$40k 
Royalties/Advertising
6% up to $1.0mm in sales, 7% thereafter
Net Worth RequirementNA

Potbelly Franchise Application and Opening Process:

Potbelly’s is privy to a strong management team. They offer a level of assistance to franchisees that is higher than most of their competitors. However, management seems all too aware of how good a concept they have on their hands -- so much so that their discussions with prospective franchisees feel similar to an interview with Goldman Sachs (an esteemed Investment Bank on Wall Street). 

The process to join the “Potbelly Nation” is long and seems to have been installed as a means of preserving exclusivity within the brand.

Steps include:

  1. Fill out a “Get Started Form” 
  2. Complete a “Detail Information Form” 
  3. Participate in a telephone interview
  4. Complete a background and credit check consent form
  5. Complete a 50 question online franchise survey
  6. Attend a 6-day in store experience
  7. Sign the preliminary Potbelly Franchise agreement
  8. Work with a designated real estate company to find a location
  9. Complete design and construction training
  10. Sign a final franchise agreement 
  11. Attend an 8 week training course
  12. Build the store
  13. Hire store staff 
  14. Open for business
Additionally, Potbelly’s is only looking for life partners to join as franchisees. Single operators are shunned. The process to become a franchisee may impede future sales or transfers due to its length. Though this model is not necessarily ideal for growth, it works very well for the maintenance of a brand. Strict guidelines result in greater quality control and standards remaining consistently upheld.

Another issue that one might find off-putting is that certain locations appear to be reserved exclusively for corporate operation. Cities in the Northeast, like Boston, would be ideal for a concept like Potbelly’s to see great success. The brand knows this and is keeping such locations for in-company operators. Honestly, who could blame them though? There isn’t much risk involved in starting up in locations like these, so it makes sense to hold on to them and profit directly.

From a financial standpoint, it should be noted that Potbelly’s makes a lot of money because stores can generate $1mm in sales and nearly 20% pre-tax margins. Some locations in Chicago generate upwards of $50k in sales per week. Rent and labor, though, are comparatively higher than Potbellys’ competitors (due to larger real estate needs) while advertising and royalties costs are about average. See financial statement at bottom.

Potbelly’s has a lot going for it as a franchise. The product is one that you can stand behind and the high cash flow doesn’t hurt either. The franchising process is long and cumbersome and there is a strong possibility of micro- managing from the brand. However, that’s most likely a method to weed out sub- par operators. If you don’t mind a brand that is cautious about the people they do business with (and has policies which demonstrate such caution), get in on Potbelly’s and snag a location with a hungry lunch crowd.

Potbelly’s 1-Store Potential Income Statement

Here's a theoretical look at a possible income statement for a single Potbelly's location:


Amount% of Sales
Average Store Sales$935,000

Royalties & Advertising$93,500
10.0%
Cost of Food & Packaging$266,475
28.5%
Labor$219,725
23.5%
Rent$93,500
10.0%
Other Expenses$93,500
10.0%
Owner Operated Cash Flow before Interest and Taxes
$168,300
18.0%
Running a Franchise While Keeping Your Career!

Something that is possible with franchise ownership that may not always work with a start-up business is the ability to maintain your career while you run your business. Although many franchisees rely on their business unit as the basis of their revenue stream, there are more people interested in buying a franchise to generate a second source of income. A flexible franchise option makes this a possibility and can afford some opportunities that other franchises cannot.

Franchise Disclosure Document for Dummies – Part 4

One key aspect of Item 12 is establishing how franchisees’ territories will be defined. This may be by zip code, population, population with certain demographics, or geographic or political markers (i.e. streets or county lines). For franchises with population-based territories, a franchisee in a busy downtown urban area may have a territory of only a few blocks, while a rural franchisee’s territory could reach for miles.

Franchise Hurdles

The first point I made ties into this, but you need to make sure you’ve done your research before you go ahead and sign a franchising agreement. And that doesn’t just mean from a financial perspective. There are so many other aspects in running a franchise that you need to understand before you get started. Most of this information can be found in the Franchise Disclosure Documents. Some of the most important things you should take a look at would be any legal issues the franchisor might have and the churn rate of franchises. Both of those could potentially be pretty significant red flags that might make you want to reconsider whether or not you want to open that franchise.