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Why Franchises Are Good for Investors

AFC Enterprises (AFCE)
Company Profile: AFC Enterprises operates and franchises quick-service restaurants under the brand names Popeyes Chicken & Biscuits and Popeyes Louisiana Kitchen.
Share price return: 10.3% this year
Franchise locations: As of Dec. 26, the company had 1,542 domestic franchised restaurants, 397 international franchised restaurants and 38 company-operated shops.
Revenue from franchises: Franchise revenue accounted for 62% of AFC's $46.8 million in total revenue last quarter. Sales at company-owned locations was $17.6 million, compared with $27.9 million in revenue from franchises and $1.3 million in rental and other revenue.
Franchise costs: The basic requirements for owning a Popeyes franchise is a net worth of $500,000, of which $250,000 must be liquid. After that requirement is met, AFC Enterprises has several franchise fees, including a $7,500 development fee per restaurant, a $30,000 franchise fee per restaurant, a royalty fee of 5% of gross sales and an ad fund that takes 4% of gross sales. These fees don't address other project costs, such as the $330,000 to $420,000 required for a building, $150,000 to $170,000 in equipment costs, and signage, which can run from $15,000 to $30,000.
Analyst view: Of the six analysts covering AFC Enterprises, half rate it a "buy" and the other half say investors should hold onto shares. BGB Securities is among the bullish firms, while Cowen & Co. say investors should sit tight.
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