IHOP Franchise Cost Too High (2022) by Vetted Biz

Written by: Parth Parth
Last Updated by Ailen Faiad: December 2, 2022
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The International House Of Pancakes or IHOP is an American chain of pancake houses specializing in breakfast foods. It is owned by Dine Brands Global — a company formed after IHOP purchased Applebee’s, with 99% of the restaurants run by independent franchisees. IHOP also offers lunch and dinner options on its menu, even though its focus is mainly on breakfast foods.

The company has 1,841 locations in the Americas, the Middle East, and the Indian Subcontinent, including 161 that are owned by area licensees and 1,680 that are franchised. It is led by its President, Jay Johns.

Dine Brands has ~3,600 restaurants across the globe. In addition to the IHOP restaurants Dine Brands has 1,787 Applebee’s (69 Applebee’s that are company owned).

Jerry Lapin, Al Lapin, and Albert Kallis founded International House of Pancakes in the Los Angeles, California area in 1958 with the help of Sherwood Rosenberg and William Kaye. The breakfast food menu later expanded (especially in the 1980s) to include standard lunch and dinner items found in similar restaurant chains such as Sambo’s and Denny’s.

In 2007, the IHOP Corporation announced the plan to acquire Applebee’s in an all-cash transaction, valued at approximately $2.1 billion. Applebee’s share price for this transaction came to $25.50 per share.

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How is IHOP Franchise Positioned in the Food and Beverage Industry?

IHOP competes in the Breakfast market against big brand companies such as McDonald’s. IHOP franchisees also compete against other nearby IHOP locations.

Click here to see more about the Food and Beverage Industry as a whole.

How Much is an IHOP Franchise?

The initial IHOP Franchise Fee is $15,000. You have to pay this upfront fee when opening an IHOP franchise.

IHOP Franchise Cost

The estimated total investment necessary to begin the operation of an IHOP Franchise ranges from $1,152,954 to $6,089,550. The following costs are part of the upfront costs included in the initial investment for an IHOP. Many of these are one-time fees that are needed to launch the franchise. Review the chart below to see how much it costs to buy an IHOP franchise in 2022.

Estimated Initial Investment

Type of expediture Amount To Whom Payment Is To Be Made
Low High
Location Fee $15,000 Certified or cashier’s check or wire transfer
Initial Franchise Fee $50,000 (less $15,000 Location Fee paid, for a total of $35,000 Certified or cashier’s check or wire transfer
Real Estate $300,000 $2,500,000 Certified or cashier’s check or wire transfer
Construction $450,000 $2,300,000 As required by contractor, architect, engineers, government, etc.
Major Equipment, and Fixtures $200,000 $600,000 As required by suppliers
Smallware Package $15,000 $30,000 As required by suppliers
Signage $15,000 $10,000 As required by suppliers
Inventory $10,000 $30,000 As required by suppliers
Working Capital $10,000 $60,000
Insurance $30,000 $75,000 As required by suppliers
On-location Assistance $0 $16,000 Certified or cashier’s check or wire transfer
Site Approval Costs $0 $50,000 As required by suppliers
Impact Study $4,000 $6,000 As required by suppliers
Opening Training Support Fee $0 $55,000 Certified or cashier’s check or wire transfer
POS Setup, Training and Support Fee $3,500 $7,980 Certified or cashier’s check or wire transfer
Tray POS Software Fees $1,100 per year $3,300 per year As required by suppliers
Europay, Mastercard, and Visa (“EMV”) Point to Point Encryption (“P2P”) Services $1,000 per year $2,500 per year As required by suppliers
Wi-Fi Services $90 per month $400 per month As required by suppliers
Kitchen Display System $15,000 $20,000 As required by suppliers
Sever Tablets $0 $20,000 As required by suppliers
On-line Ordering $91 per month As required by suppliers
Mobile Device Management (“MDM”) Fee $12 per year $480 per year Certified or cashier’s check or wire transfer
Digital Products Service Fee $0 per month $350 per month Certified or cashier’s check or wire transfer
Implementation Fees $250 $1,500 Certified or cashier’s check or wire transfer
POS System $20,000 $30,000 As required by suppliers
Wait Listing $15 per month $69 per month As required by suppliers
Curb Side Pick Up—Fly Buy/I’ve Arrived $20 per month $30 per month As required by suppliers
Customer Relationship Management (“CRM”) Fee $0 per month $150 per month As required by IHOP
Catering $0 per month $30 per month As required by suppliers
Initial Additional Training Expenses $4,000 per person $7,000 per person As required by suppliers
Supply Chain Co-op Stock Purchase $0 $100 Check or money order
Additional Funds—3 months $16,500 $85,250 Checks
Miscellaneous $5,000 $26,000 As required by suppliers
TOTAL $11,152,954 $6,089,550

That is a midpoint investment of $3,621,252. This is higher than most franchises in the Food and Beverage industry with $466,000 per franchise being the average for the industry.

IHOP also offers Express locations with a midpoint investment of $2,058,302. When IHOP Average Unit Volume (AUV) is compared with this cost, it is still too high. We will talk about this below.

IHOP Franchise Requirements

IHOP requires prospective franchisees to have a minimum net worth of $1.5 million with at least $500,000 worth of liquid assets.

Owning an IHOP Franchise Requires Ongoing Fees

Royalty: 4.5% of total Gross Sales 

National Advertising Fee: 3.5% of total Gross Sales

Tech Support Fee: $1,000 to $1,800 

These fees are lesser than the industry standards.

How much do IHOP franchise owners make?

IHOP does not make any financial representations about its franchises, so we are going to estimate Average Unit Volume (AUV) from their financials.

2021 IHOP Average Unit Volume: $1,808,690

Initial investment (midpoint) %Profit margin of median franchise sales Estimated Profits Time to recoup investments
$3,621,252 10% $180,869 20 years
15% $271,303 13 years
20% $361,738 10 years

Based on the AUV for IHOP’s franchise locations, at an average of a 15% profit margin it will take around 13 years to recoup your investment. This is longer than other franchise opportunities. You may not get a 15% profit margin which would elongate getting a return on your investment.

Many factors affect the sales, costs, and expenses of your Franchised Store. Such as the Franchised Store’s size, geographic location, menu mix, and competition in the marketplace. The presence of other Breakfast offering stores; the extent of market penetration and brand awareness that IHOP stores have attained in your market. Also, the quality of management and service at your Franchised Store are major factors.

Is the IHOP Franchise Profit Worth the Franchise Cost?

To assign a valuation multiple for IHOP franchises, we leverage estimates from DealStats, a database of acquired private company transactions sourced from U.S. business brokers and SEC filings. We reviewed the larger franchise industry as well as selling price multiples for larger systems where more transaction data is available.

When you go to sell an IHOP franchise based on the median multiple of .59 and AUV in 2021 of $1,808,690, it would sell for $1,067,127. This is significantly lower than the midpoint investment of $3,621,252.


The more franchises you own, the more earning potential you have as private equity firms become interested in your business instead of individual owner-operators.


 

How do IHOP Franchise owners make money then?

Through a process called Sales Leaseback. Basically, the franchisee sells the land they own for a good price. This might even be up to $2 million to $4 million depending on the area and customer volume. The franchisee then keeps operating the franchise under a lease agreement. If sold on the upper end of the range, an IHOP franchisee can live off the profits as the cost of the franchise can be recovered. This is an excellent strategy for franchises like IHOP that might not make enough money to recover profits fast enough.

The property above is an example of an IHOP location that’s on a lease from the lessor, Ben-Moshe Brothers. Similarly, an example of a property from Triple Net Properties is below.

IHOP (Franchisor) Income Statement Key Insights

Statement of Income

(in thousands) Years ended in January 2,
2022
Revenues
Franchise Revenues $122,463
Financing revenues $1,444
Total revenues $123,907
Costs and Expenses
Franchise expenses:
Advertising expenses $51,660
Bad debt expense reversal $(2,377)
Other franchise expenses $851
Total franchise expenses $50,134
Financing expensese $39
General and administrative expenses $15,479
Total costs and expenses $65,652
Other income, net $1,389
Net income $59,644

IHOP is a very profitable business for the franchisor with retained earnings of $59 million in 2021. Without historical financial data, it is not possible to say how strong that growth is.

How many IHOP units have opened and closed?

Outlet Type Year Outlets at the Start of the Year Outlets at the End of the Year Net Changes
Franchised 2019 437 434 -3
2020 434 432 -2
2021 432 496 +64
Company-Operated 2019 319 312 -7
2020 312 326 +14
2021 326 277 -49
Total Outlets 2019 756 746 -10
2020 746 758 +12
2021 758 773 +15

Over the last three years, the company has been in decline. Franchising units have decreased. Over the last three years, franchises have closed at a rate of 17 units a year. This is an indicator that these stores may not be performing well. Or that franchisees’ franchise terms are up and they are not renewing it.

Conclusion

IHOP is an established brand in the US market, but its cost is just too high at this point. More franchisees are leaving the business at an accelerating rate.

While this may be the business for you, make sure to also check out other businesses offered on Vetted Biz and in the Food and Beverage Industry.