McDonald’s is the quintessential American fast-food chain restaurant. It was founded in 1940 as a restaurant operated by Richard and Maurice McDonald in San Bernardino, California, United States. Since then, they have been serving hamburgers, chicken nuggets, french fries, milkshakes, and ice cream. In the present day, it has over 36,000 locations in over 100 countries around the world.
McDonald’s has been a franchising company since 1955 and has relied on its franchisees to play a major role in the system’s success. Currently, about 95% of all U.S. restaurants are franchised to independent franchisees and about 5% are company-owned.
Chris Kempczinski is the current President and Chief Executive Officer of McDonald’s Corporation. He joined the company in 2015 overseeing global business strategy, business development, and innovation. In addition to this, he previously served as the President of McDonald’s USA and was responsible for the business operations of approximately 14,000 McDonald’s franchises in the US.
The total investment to begin the operation of a traditional McDonald’s franchise ranges from $1,366,000 to $2,450,000, which includes an initial franchise fee of $45,000- that must be paid to the franchisor. Initial franchise fee for satellite locations is $500 (none if it’s on a Walmart location), for STR/STO locations is $22,500 and Franchisees with a ten year term or less agreement will get a prorated initial fee.
Below is a breakdown of the total initial investment:
|Type of expediture||Amount||Method of payment||When due||To whom payment is to be made|
|Initial Franchise Fee||$45,000;||Lump Sum||On opening||McDonald’s|
|$0 to $500|
|Real Estate and Building — 3 Months’ rent||Base Rent $0 to $313,000;||Monthly||Base: Current month, Base Rent due, 1st of the month; Percent: 10th of following month||McDonald’s|
|$0 to $60,000;|
|$0 to $60,000;|
|Percentage Rent 0.00% to 0.31.75%;|
|0.00% to 0.15%;|
|0.00% to 15.75%|
|Signs, Seating, Equipment, and Decor||$1.000,000 to $1,600,000;||Lump Sum||Before Opening||Vendors|
|$670,000 to $1,210,000;|
|$340,000 to $520,000|
|Open Inventory||$20,000 to $39,000;||Lump Sum||Before Opening||Vendors|
|$13,500 to $25,000;|
|$10,000 to $32,000|
|Miscellaneous Opening Expenses||$48,000 to $60,000||As Incurred||As Incurred||Vendors Utilities|
|Travel and Living expenses While Traveling||$3,000 to $38,000||As Incurred||As Incurred||Airlines Hotels Restaurants|
|Additional Funds — 3 months||$250,000 to $355,000;||As Incurred||As Incurred||Employee Suppliers Utilities|
|$185,000 to $225,000;|
|$80,000 to $110,000|
|TOTAL||$1,366,000 to $2,450,000;|
|$942,000 to $1,640,500;|
|$481,000 to $820,500|
They require significant Business Experience, as well as other requisites such as:
The median annual sales volume of franchised McDonald’s restaurants open at least 1 year as of December 31, 2021, was $3,366,000 during 2021 —a $458,000 increase compared with the amount recorded in the previous FDD regarding 2020 numbers.
Using the median annual sales and the midpoint investment of $1,813,897, we calculated the time it would take you to recoup your investment and below are the results of our analysis.
|Initial investment (midpoint)||%Profit margin of median franchise sales||Estimated Profits||Time to recoup the investment (including 2 years for scaling up)|
With a profit margin of 10% or more, it would take about 8.5 years or less to recoup your initial investment.
When you go to sell a McDonald’s franchise based on the median multiple of 0.34 and net sales of $2,908,000 in 2020, it would sell for $988,720. This is lower than the midpoint initial investment of $1,813,897 by about $800k. Your business would therefore sell for less than your initial total investment.
However, with net sales over $5 million, the median multiple increases to 0.86. In consequence, owning several franchises whose average net sales are over $5 million would yield a bigger income. For example, if you own 10 outlets, the estimated net sales would be about $29,080,000. With a sell median multiple of 0.86, the resale value of this multi-system business would be $25,008,000 which is higher than the estimated initial investment of $18,138,970. Therefore, the business will be worth over $6 million more than your initial investment.
|Sales by Company-operated restaurants||$2,616.5||$2,394.7||$2,489.7|
|Revenues from franchised restaurants||6,093.9||5,261.0||5,353.0|
|OPERATING COSTS AND EXPENSES|
|Company-operated restaurant expenses|
|Food & paper||719.6||676.6||724.2|
|Payroll & employee benefits||822.4||765.3||828.5|
|Occupancy & other operating expenses||564.0||547.6||548.9|
|Franchised restaurants — occupancy expenses||1,188.2||1,164.3||1,125.7|
|Selling, general & administrative expenses||695.6||625.1||586.8|
|Other operating (income) expense, net||13.3||133.4||0.5|
|Other Restaurant Expense||107.3||127.1||119.5|
|Total operating costs and expenses||4,110.4||4,039.4||3,934.1|
|Operating income before royalty to parent||4,754.6||3,789.1||4,068.7|
|Royalty expense to parent||923.2||813.5||811.6|
|Interest expense — net of capitalized interest of $3.3, $2.7 and $3.5||45.8||79.3||97.5|
|Non-operating (income) expense, net||(1.7)||(2.5)||(4.1)|
|Income before provision for income taxes||3,787.3||2,898.8||3,163.7|
|Provision for income taxes||934.2||391.9||782.7|
To the franchisor, McDonald’s is a very profitable business with an average annual net income of over 2 billion dollars. The average net income of 2021, 2020, and 2019 was $2.480 billion. Franchised restaurants generated the highest revenue averaging about $5.5 billion annually. High net incomes are a testament to the success of the McDonald’s franchise business.
|Adjustments to reconcile to cash provided by operations|
|Charges and credits:|
|Depreciation and amortization||840.7||813.9||726.7|
|Deferred income taxes||11.7||139.3||151.2|
|Changes in working capital items:|
|Inventories, prepaid expenses and other current assets||(14.4)||3.4||25.7|
|Income taxes, state||77.9||(31.8)||2.8|
|Other accrued liabilities||117.3||(44.4)||14.2|
|Due (to) from parent, net||52.2||(146.0)||(279.9)|
|Cash provided by operations||4,037.4||3,115.3||2,979.3|
|Property and equipment expeditures||(940.7)||(890.4)||(1,480.5)|
|Purchases of restaurant businesses||(255.5)||(1.6)||(6.7)|
|Sales of restaurant businesses and property||104.3||9.6||126.7|
|Cash used for investing activities||(1,184.3)||(894.8)||(1,694.0)|
|1. Long-term financing issuances||0.1||0.1||0.1|
|2. Long-term financing repayments||(0.2)||(0.4)||(0.4)|
|Dividends to parent||(2,853.1)||(2,212.9)||(1,280.6)|
|1. Cash used for financing activities||(2,871.9)||(2,213.2)||(1,294.8)|
|2. Cash and equivalents increase (decrease)||$(18.8)||$7.3||$(9.5)|
|3. Cash and equivalents at beginning of year||$49.3||$42.0||$51.5|
|4. Cash and equivalents at end of year||$30.5||$49.3||$42.0|
|Supplemental cash flow disclosures|
|Interest paid (excluding amounts paid to parent)||$—||$0.3||$0.3|
|State income taxes paid (excluding amounts paid to parent)||$121.0||$70.7||$64.8|
McDonald’s reported positive cash and equivalents at the end of 2021, 2020, and 2019, averaging about $40.6 million. Therefore, its cash flow statement indicates that the business manages their investing and financing activities appropriately, which is a sign of healthy financials.
|Outlet type||Year||Outlets at the Start of the Year||Outlets at the End of the Year||Net Change|
At the end of 2021, there were 12,775 franchised outlets. A total of 247 outlets closed down in 2021 and 163 had closed down in 2020. The 2020 closures could be attributed to the negative economic effects of the Covid19 pandemic, which led to most franchisees not renewing or extending the franchise at the end of the specified term. Furthermore, the closures could be a result of a mutual agreement during the franchise term.
I had an intimate relationship with franchisees being on the corporate side. I would be communicating with over 100 franchises on a daily basis.
“In terms of the category, look, from a traffic perspective, it is not a growing category”
Eventually, if you don’t attract younger customers, your core customer is going to eventually go away. That’s also part of the problem that we’re seeing with the informal eating-out brands. That’s why, in order to gain revenue, you have to get it through other methods if you’re not doing so through traffic.
“The only main thing that you have mentioned is that the prices are a little bit more comparable or maybe McDonald’s isn’t perceived as such a great value as it used to be. But the other thing that’s happening, and I’m sure you’ve noticed, is that the food at-home pricing is now actually increasing at a faster rate than food away from home being restaurants.”
There are over 36,000 McDonald’s franchises around the world with about 13,000 of them in the United States. The company has a long history of franchising dating back to 1955 which has played a big role in its success over time.
With an average initial investment of about $1.8 million, it would take you 8.5 years or less to recoup your investment with a 10% or more profit margin. These figures are calculated from the 2020 average median net sales from a McDonald’s franchise in the US which is about $2.9 million. The number of franchised outlets has continued to increase in the US apart from 2019 and 2020 when 207 outlets closed down. This could be attributed to the negative economic effects of the Covid19 pandemic which saw a lot of small businesses around the country shut down. To the franchisor, McDonald’s is a very profitable business with net incomes averaging over $2 billion annually.
If you want to own a franchise, we advise that you speak to at least 5 McDonald’s franchisees to get a better understanding of their business. You can also explore other potential franchising opportunities on our Vetted Biz website which has accessible and analytical data on franchises and businesses available in the U.S.
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