Blessed Are the Sandwich Makers
By Carleen Hawn

(Business 2.0) – After graduating from Skidmore College in 1998, Todd Nation went shopping for a business with just $100,000. He soon realized that his options were mostly limited to laundromats and a suffering Subway franchise; he chose the Subway. "It was easier than starting from scratch," says Nation, 28. "In terms of cash flow, there's no better business than a restaurant franchise."

If you've caught the entrepreneurial bug, buying a franchise can be a quicker way to start seeing green than wooing VCs and lining up clients for beta tests. Despite their burger-flipping connotations, franchises are hardly a business backwater: They account for $1.5 trillion in annual economic output, and an index of the 50 largest publicly traded franchise businesses has beaten the S&P 500 every year since 2000. Sure, you'll give up some independence--franchisors often prescribe how businesses should be run, down to the smallest detail--but you'll also be buying a proven business model with brand awareness and predictable startup costs. Even after accounting for royalty fees (typically 4 to 9 percent of total revenue) and a minimum marketing budget, you can recoup your investment within two to three years and start taking a cut of the cash flow. "The average Burger King does $1.1 million in sales the first year," says Jeff Rosenfeld of Minneapolis-based Kessev Finance, a corporate finance firm that serves franchise businesses, "so you could generate cash flow to cover your operating costs from the very first month." (For Rosenfeld's list of the best bets for cash flow, see "Franchise Favorites," at right.)

To buy his first Subway in Manhattan, Nation put up $75,000 and financed another $37,000 through liens on his equipment. With the basics of his business preordained, Nation focused on sales enhancements: Noticing that cookies sold better when customers saw them coming out of the oven, he began baking them during the lunch rush instead of in the morning. "We sold four times as many cookies as any other store," he claims. Soon his store was generating more than $1 million in annual sales and about $250,000 in net income--making it one of Subway's most profitable. Plus, the franchise always had about a month's worth of expenses--around $50,000 in cash--sitting in the bank, which allowed Nation to cut himself a dividend check every so often to supplement his $50,000 annual salary. He used those dividends to invest in a second location, and last January he sold his first store for $685,000, then the highest price ever paid for a Subway franchise.

Not every franchisee can be as successful as Nation, but there are plenty of resources to get you started, such as the International Franchise Association and the American Association of Franchisees and Dealers, as well as the Uniform Franchise Offering Circular document for your prospective franchisor. Franchising may require research, but it sure beats owning a laundromat. -- C.H.