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McDonald’s Franchise and FDD Review

McDonald’s Franchise

So real quick, just wanted to go through… Franchisors have emulated their business model. It was founded in 1955. It’s based in Illinois, headquartered in Chicago. We’re going off data from their FDD released in May of this year, May 1st, 2020. They have 659 corporate locations. That means McDonald’s themselves own and operate those 659 locations, but compared to the number of franchise units that they have across the U.S., at nearly 13,000, the corporately owned and managed locations is very small. One thing I wanted to bring before going into how much it costs to open a McDonald’s and then how much McDonald’s make is the data on units opened and closed. So going back to 2016, you could see basically for every two locations they open, they close one, which is not a great ratio. But when you look at to 2019, for every one location they opened, they closed one and a half. This is not a good ratio. You don’t want to necessarily be investing in a franchise system that is closing more units than they’re opening. And if that is the case, you want to have a very clear idea of why they are closing these locations. Is it due to the poor performance of the operator? Were those locations not sufficient and they should never have been opened? It’s really important to understand why these units are closing before investing in a McDonald’s franchise, Subway franchise, or any franchise for that matter.

How much does a McDonald’s cost?

So how much does a McDonald’s franchise cost? The total investment to establish a McDonald’s franchise is as high as $2.2 million. This includes the franchise fee that is $45,000 this excludes any land or lease costs. There are many McDonald’s franchisees that also own the property. So the initial investment amount can range anywhere from $464,000 to around $2.3 million. And with that, it includes the franchise fee, working capital needs generally for the first few months. And all of that is detailed in the FDD, which from McDonald’s is a 500 plus page document. And then once the store has been built out and operations begin, that’s when you have to start paying the royalty fee, which is 4% on monthly sales, and then the marketing fee of 4%. The marketing fee is a little high compared to other food and beverage franchises. This includes data from 523 food and beverage concepts. That’s how we calculated the average marketing fee at 2.3% as well as royalty. So McDonald’s royalty at 4% is a little lower than industry average for food and beverage franchises, although the marketing fee at 4% is significantly higher. So it’s very important to understand how they’re using those marketing expenditures to help improve your store operations principally through increased sales.

McDonald’s FDD: Franchise Disclosure Document

I’m gonna pause for a moment and go through the McDonald’s FDD. Okay. So here you can see the FDD from 2020. One of the key areas of the franchise disclosure document for any franchise, whether it’s McDonald’s or not, is item 19. Roughly 50% of franchisors, especially the large franchise systems will disclose their financial performance. In addition to the item 19, it’s important to talk to franchisees to better understand the profit and loss and reasonable expectations for the point to break-even, ability to open up multiple locations, and then have shared costs throughout those locations. Those are all important factors to consider before investing in a franchise. So you can see here of the approximately 12,000 U.S. McDonald’s restaurants opened at least 1 year, as of December 31st, 2019 approximately 79% had annual sales volumes in excess of $2.3 million. That’s pretty substantial. And you can see 70% had annual volumes in excess of $2.5 million and 60% over $2.7. The average annual sales volume of a U.S. traditional McDonald’s restaurant opened at least one year was right around $3 million during the reporting year of 2019. The highest and lowest annual sales volume in 2019, for those domestic traditional McDonald’s restaurants, was $12.6 million and $654,000 respectively. I like to also see the median. So the median sales volume of the U.S. McDonald’s restaurants opened at least one year, again, as of December 31st, 2019 was $2.9 million, which is way above average for a food and beverage franchise.

McDonald’s Growth and Sales on the FDD

Key to know, you know, when you’re talking to franchisees, if you’re looking to invest in McDonald’s are the new franchisees coming making that much or are those the ones that have the best location and they’ve been in that location for the last 20 years? Very important to understand, you know, are the ones clearing $2 million more predecessor locations that have been operating for many years or are they more of the new locations? And it’s really important if you’re not buying an existing McDonald’s to really understand and talk to franchisees that have recently opened up McDonald’s franchises, say over the last two to five years and see how their performance is. It’s great that they also include performance. So you can see product sales to say on the low end $2.3 million, total cost of sales $655,000. Twenty-eight percent’s pretty good when you’re looking at your cost of goods sold. If labor is also, you know, 30%, maybe a little higher, a little lower and costs of goods sold as well as labor is under 60%, usually in a pretty good situation, 55% is great. Anything 50% or below is extremely excellent for a food and beverage franchise. You can see the gross profit at 71% is fantastic. Other operating expenses, those includes rent, service fees, depreciation, amortization, interest and…sorry, this includes rent, service fees, depreciation, amortization at 45%, and operating income before occupancy costs at $607,000. Generally operating costs, you know, it shouldn’t be more than 10% of your sales. There can be exceptions there though.

McDonald’s Overall Financials

So overall very solid financials for McDonald’s. For those considering investing in a McDonald’s franchise, obviously, if you’re looking to purchase an existing McDonald’s location, it’s a little easier, because you can go back three-plus years on the tax returns and do a forensic due diligence together with your accountant. And for opening a new McDonald’s location, there’s a lot more factors to consider, especially if you’re going to own the property or do a sales leaseback. There’s a lot of options in terms of a ground-up McDonald’s that you build, or if you’re looking at non-traditional outlets, like in an airport, a train station, those are other things. There are a lot of other items to consider.

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