At its peak in 2015, Subway operated more than 44,000 locations worldwide — more than McDonald's. It was the largest restaurant chain on earth by location count, a franchise success story that had been built over five decades from a single sandwich shop in Bridgeport, Connecticut.

By 2023, Subway had closed more than 7,000 locations, sold the company to private equity firm Roark Capital for a reported $9.6 billion, and become one of the most studied cautionary tales in franchise history.

Sources: Bloomberg, "Subway's Struggles Show the Limits of the Franchise Model" (2020); Restaurant Business Online, "Subway's Long Decline, in Charts" (2023); Bloomberg, "Roark Capital Agrees to Buy Subway for About $9.6 Billion" (August 2023).

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How Subway Got Here

The Oversaturation Problem

Subway's growth strategy was built on volume. The company charged relatively low franchise fees and encouraged franchisees to open locations aggressively — including in markets that were already saturated with existing Subway units.

This created a structural problem: new locations cannibalized sales from existing ones. Franchisees who had invested their savings into a location found their revenue declining not because of poor performance, but because the franchisor had approved a new Subway across the street.

Franchisee advocates documented this pattern for years. The company's franchise agreement gave Subway broad authority to approve new locations without regard to the impact on existing franchisees — a practice known as encroachment.

The Royalty Structure

Subway charged franchisees an 8% royalty on gross sales — one of the highest in the quick-service restaurant industry. This royalty was calculated on revenue, not profit. In a low-margin business like sandwiches, an 8% gross royalty can consume a significant portion of a franchisee's actual profit.

As same-store sales declined due to oversaturation and increased competition from fast-casual chains like Chipotle and Panera, franchisees found themselves paying the same royalty percentage on shrinking revenue — while their fixed costs remained constant.

The Refresh Program

In 2016, Subway launched a mandatory store refresh program requiring franchisees to renovate their locations at a cost of $10,000 to $30,000 per store. The program was intended to modernize the brand's appearance and compete with newer fast-casual competitors.

For franchisees already struggling with declining sales, the mandatory renovation requirement was a significant financial burden. Many chose to close rather than invest in a location that was not generating sufficient returns.

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The Numbers Tell the Story

According to Restaurant Business Online's analysis of Subway's FDD filings:

• 2015: 27,103 U.S. locations (peak)
• 2019: 23,801 U.S. locations
• 2022: 20,576 U.S. locations
• Net closures 2015–2022: approximately 6,500 U.S. locations

The closure rate — the percentage of locations that closed in a given year — consistently exceeded the industry average during this period. For buyers who had purchased Subway franchises in the 2010s, the FDD data that was available at the time of purchase did not reflect the trajectory that was already underway.

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The Roark Capital Sale

In August 2023, Roark Capital — the private equity firm that also owns Arby's, Buffalo Wild Wings, and Sonic — agreed to acquire Subway for approximately $9.6 billion.

For the founding family, the sale represented a successful exit. For franchisees, the implications were less clear. Private equity ownership typically brings pressure to improve unit economics and EBITDA — which can mean increased royalties, mandatory technology investments, or accelerated closure of underperforming locations.

We cover the broader implications of private equity in franchising in our post on the Jersey Mike's deal.

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What the FDD Would Have Told You

The information that predicted Subway's decline was available in its FDD — for buyers who knew where to look.

Item 20 — the outlet summary — showed the number of closures, transfers, and terminations each year. A buyer reviewing Subway's FDD in 2018 would have seen closure rates that were significantly above the industry average.

Item 19 — the financial performance representation — showed average weekly sales figures. A buyer who compared those figures to the royalty rate and estimated operating costs could have calculated that margins were thin and declining.

Item 12 — the territory provisions — disclosed that Subway did not grant exclusive territories. A buyer who read this carefully would have understood that the franchisor could approve competing locations.

The information was there. Most buyers did not read it carefully enough.

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What Smart Buyers Take From This

Subway's story is not unique. It is a pattern that has played out in multiple franchise systems: aggressive growth, franchisee oversaturation, declining unit economics, and eventual restructuring.

Before buying any franchise:

1. Calculate the closure rate from Item 20. Divide closures by total outlets. Compare to the industry average of approximately 15% (FRANdata).
2. Read the territory provisions in Item 12. Understand exactly what protection — if any — you have against encroachment.
3. Model the unit economics yourself. Take the Item 19 revenue figures, subtract the royalty, marketing fund, and your estimated operating costs. What is left?
4. Use FDD Score™ to analyze the full FDD and flag risk factors before you sign.

The franchise model works. But it works better for some parties than others — and the FDD tells you which side of that equation you are likely to be on.

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Sources: Bloomberg (2020, 2023); Restaurant Business Online (2023); Subway FDD filings 2015–2022; FRANdata Industry Report 2023; Roark Capital acquisition announcement (August 2023).