FDD Talk 2017: What You Need to Know About the Chronic Tacos Franchise Opportunity (Financial Performance Analysis, Costs and Fees)

In this FDD Talk 2017 post, you’ll learn the following:

• Section I – Background information on the Chronic Tacos franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Chronic Tacos franchise, based on Item 7 of the company’s 2017 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Chronic Tacos franchise, based on Items 5 and 6 of the company’s 2017 FDD

• Section IV – Presentation and analysis of Chronic Tacos’ financial performance representations, based on Item 19 of the company’s 2017 FDD, including information on the:

• 2016 average gross sales, cost of goods sold, gross profit, other operating expenses, and EBITDA for the top 25%, bottom 25%, and all 10 franchised Chronic Tacos restaurants located in Los Angeles County and Orange County, California that were open and operating for more than one year as of December 31, 2016. These 10 franchised Chronic Tacos Restaurants were selected because the information was available to the franchisor and believed to be complete, accurate, and reliable.

• 2016 median gross sales, cost of goods sold, gross profit, other operating expenses, and EBITDA for the 10 franchised Chronic Tacos restaurants in the sample

Section I – Background Information

12 Things You Need to Know About the Chronic Tacos Franchise

Plans to Expand into Japan

1.  At the end of September, Chronic Tacos announced plans to expand into Japan. Chronic Tacos signed a 10-year master franchise agreement with K&B Brothers, a subsidiary of Kadoya group, based in Tokyo, Japan. That country’s first location is scheduled to open sometime in late 2017 in Tokyo.

2.  Ryohei Iwatani, President of K&B Brothers, said, “I believe that there is a lack of quality fast-casual Mexican food in Japan and am looking forward to bringing the unique flavor and branding of Chronic Tacos to this country.” Additionally, Chronic Tacos President and CEO Michael Mohammed thinks that the brand will do well in Japan “as there isn’t anything else like it outside of North America.”

Launches New Mobile App

3.  Chronic Tacos launched its first customer loyalty mobile app near the end of August. The Chronic Tacos app is available on Android and Apple iOS and allows consumers to order and pay for food in addition to offering rewards such as a free taco just for downloading the app.

4.  App features include:

• Pay by phone—users can add a credit/debit card to the app and use that card to pay for orders through the app
• Place an order so it’s ready when you arrive
• Earn and track loyalty points and redeem them for rewards (every dollar spent will earn 1 point)

5.  Customers will be able to redeem their rewards whenever they want for the following items: 25 points = free churro bites; 50 points = one free taco; 75 points = one free small burrito; and 100 points = any menu item for free.

6.  The company says that its previous loyalty rewards program will be honored for the first few months after the app’s release and that customers can transfer any current loyalty points to the new app.

7.  Michael Mohammed, President and CEO of Chronic Tacos, said, “The most important thing we can do is listen to our customers and make the Chronic Tacos experience as easy as possible for them. We knew embracing technology and creating an app could shift the way consumers order and pay for food and help even more people embrace ‘The Taco Life.’”

Continued Growth

8.  Although Chronic Tacos has been franchising for over a decade, most of the brand’s growth has taken place over the last year and the company says that it will continue to build upon this new growth into 2018. In 2016, Chronic Tacos saw a 50 percent expansion and over the summer, the brand said that it will have opened 26 new locations in the U.S. and Canada by the end of 2017.

9.  Chronic Tacos plans to keep growing throughout 2018 and already announced that next year’s openings include restaurants in Barstow, California; Newbury Park, California; Alberta, Canada; Denver, Colorado; and Mid-Town Westside, Georgia. President and CEO of Chronic Tacos Michael Mohammed said that the company is in “full momentum” and has no plans to stop anytime soon.

Company History

10.  Chronic Tacos was founded in 2001 by Randy Wyner and Dan Biello in Newport Beach, California. At the time, Wyner and Biello didn’t have any restaurant experience so Wyner’s friend provided them with help and an authentic family recipe for their tacos. In 2006, Biello’s brother Mike Biello joined the company and the trio formed Chronic Tacos Enterprises to start franchising the brand.

11.  That same year, the first franchised location was opened in San Clemente, California. Chronic Tacos’ growth has remained moderate and there are currently over 50 locations in states such as California, Arizona, North Carolina, Washington, Colorado, Nevada, Utah, and Alabama. There are also a few international locations in Canada.

Entrepreneur’s Franchise 500

12. Chronic Tacos has ranked only once on Entrepreneur’s annual Franchise 500 list in the last decade. It ranked No. 455 in 2017.

Section II – Estimated Costs

• Please click here for detailed estimates of Chronic Tacos franchise costs, based on Item 7 of the company’s 2017 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Chronic Tacos’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2017 FDD.

Section IV – Financial Performance Representations (Item 19, 2017 FDD) and Analysis

Table 1 – 2016 Average Gross Sales, Cost of Goods Sold, Gross Profit, Other Operating Expenses, and EBITDA for 10 Franchisee-Owned Taco Restaurants

• Table 1 includes actual historical unaudited information the franchisor has accumulated for 10 Chronic Tacos Restaurants that were owned and operated by its franchisees in 2016. All 10 franchised Chronic Tacos Restaurants included in Table 1 are located in Los Angeles County and Orange County, California.

• All of these franchised Chronic Tacos Restaurants are operations similar to the franchise offered in the Disclosure Document.

• The figures in Table 1 are taken from reports submitted to the franchisor by certain Chronic Tacos franchisees on their Gross Sales, Cost of Goods Sold, Gross Profit, Other Operating Expenses, and EBITDA.

• On December 31, 2016, there were a total of 35 franchised Chronic Tacos Restaurants owned and operated by franchisees. Ten are included in Table 1, which is 28.6% of the 35 franchised Chronic Tacos Restaurants in operation on December 31, 2016.

• The 10 franchised Chronic Tacos Restaurants included in Table 1 were selected because the information was available to the franchisor and believed to be complete, accurate, and reliable. Similar information for the remaining 25 franchised Chronic Tacos Restaurants was either unavailable to the franchisor or believed to be incomplete, inaccurate, or unreliable. All information is unaudited.

• All 10 franchised Chronic Tacos Restaurants included in Table 1 were open and operating for more than one year as of December 31, 2016.

• Gross Sales means the aggregate of the total revenues derived from sales of any nature or kind whatsoever from each Chronic Tacos Restaurant included in Table 1, whether evidenced by cash, services, property, barter, or other means of exchange, including orders taken in or from the Chronic Tacos Restaurants although filled elsewhere.

• Gross Sales includes the full value of meals the franchisees provided to their employees as incident to their employment (less the value of any discounts against Gross Sales given during the month in which the meals were provided) and all proceeds from the sale of coupons, gift certificates, or vouchers.

• Gross Sales excludes the amount of bona fide returns paid to customers and the amount of sales or use taxes actually paid to any governmental authority and the retail price of any coupons, gift certificates, and vouchers when they are redeemed.

• Cost of Goods Sold means the franchisees’ expenses for food, beverages, and paper goods.

• Gross Profit means Gross Sales less Cost of Goods Sold.

• Other Operating Expenses means the franchisees’ expenses for all other expenses related to the operation of the Chronic Tacos Restaurants (other than expenses for food, beverages, and paper goods), including labor and rent.

• EBITDA means the franchisees’ net earnings before interest expenses, taxes, depreciation, and amortization are subtracted.

• Chronic Tacos Restaurants operating in low population density areas will also have lower sales than locations in high population density areas. Your results will vary based on your regional demographic density, competitive factors, and your ability.

• Chronic Tacos Restaurants located outside of Southern California may also have lower sales than the 10 franchised Chronic Tacos Restaurants included in Table 1.