Owning a McDonald’s Franchise: Purchase Cost vs. Annual Profit

mcfranchise_logoDespite their negative media attention, the McDonald’s franchise that I drive past every day is packed all the time. I rarely eat there (especially since my diet bet), but I used to think to myself that if I were going to buy a franchise, I’d buy a McDonald’s. My impression was always that McDonald’s were always pretty clean with consistent food (even if you consider it consistently unhealthy), while Burger King’s were often dirty with inconsistent food.

A common knock against purchasing a franchise is that you are “buying a job”. A recent Businessweek article broke down the gross sales, gross profits, and net profits of the average McDonald’s franchise in the US. I found the numbers very interesting:

mcfranchise_income

Average annual profit per franchise: $150,000 a year, roughly. Okay, but how much does this franchise cost? From the official McDonald’s franchise website:

Initial Costs
$45,000 Initial Fee paid to McDonald’s

Equipment and Pre-Opening Costs
Typically these costs range from $944,352 to $2,172,045. The size of the restaurant facility, area of the country, pre-opening expenses, inventory, selection of kitchen equipment, signage, and style of decor and landscaping will affect new restaurant costs. These costs are paid to suppliers.

Average cost of new franchise: At least $1 million roughly, with a minimum of $500,000 in cash and non-borrowed resources. Other sources state $750,000 minimum in liquid assets. You must be able to cover 40% of the costs of a new franchise location. You must be able to pay cash for at least 25% of the cost of an existing franchise, with the rest financed over at most 7 years.

Average hours of work per week as an owner/operator? I could not find reliable statistics, but here is an excerpt from a Reddit AMA from a businessperson from New Zealand who has owned a total of three McDonald’s franchises and recently sold the last one.

How much work was required of you per week on average? If my goal were to own one McDonalds and do the minimum amount of work possible, while also running it well, how low do you think I could get that weekly number of hours? And what would I be doing in that time?

I would work 9am – 5pm, 6 days a week. Mostly I’m at my office sorting problems remotely from there. I liked to pop down to my couple stores at least a couple times a day and check on them – make sure they’re clean, and to check on the Restaurant Manager about any issues. Typically I used to work hard for 4-6 hours a day, with the rest out in the stores just checking on them.

Exit / Selling price? One would imagine that if your franchise is doing well and churning out good numbers, someone else would readily buy it. If your business is struggling, then both your annual income and total business value will drop. The same Reddit user above reported selling for “just above” NZ $1.4 million, or US $916,000. I’m a bit confused by the purchase price, but it appears that he paid NZ $550,000 via business loan, 12 years ago.

In the end, owning a McDonald’s franchise is still a business which means you take on risk for potentially significant gains or losses. But if you spend 40 hours a week and only keep tabs on one location, it might really feel like you bought a job. These statistics help explain why most franchisees own multiple locations; Businessweek says the average is six.

Comments

  1. Great summary, thanks for sharing. I would note that a job would be far less stressful than owning just one franchise location of McDonald.

  2. Interesting topic. I was recently on a trip to Chile and got to know a french guy who owns/runs a chain of nail salons there. Started with one and expanded to (now) 23 locations, most of which are franchises. Still manages to run the whole thing with minimal upper management. Seems like they require a lot less time than in this example, but that might be the advantage of owning the brand and delegating most of the management to franchise owners. I get the impression most of his net worth is still in the business. He says he’s wanted to own a chain of stores since childhood. He’s built for it. Most people probably aren’t.

    • I don’t know if that guy is telling to truth or not. But I’ve been a Nail Salon owner for 12 years. And it’s not easy. I work 9 to 11 hours a day and 6 days a week. I love my business but I don’t feel like I have a life. That is why I’m looking for something else.

  3. Joshua Katt says:

    Yeah, one is definitely not worth that pay or hassle but multiples could be. Great article and analysis.

  4. Looks like it would make more sense to be the store manager than site owner! Great article.

  5. Antonio Hilaire says:

    Great article but i like to hit at least 200,000 K in profit for 1 and close to half a million for 2. There’s nothing in the world that can be any where close to being a business owner. Only entrepreneurs know that.

  6. McDonald’s franchise
    Territory and origin: franchises do not receive exclusive territory and may face competition from other franchises or fellow McDonald’s owned outlets. The franchise agreement does not contain any exclusive grant to: area, territorial rights, protected territory, or any right to exclude, control, or impose conditions on the location or development of future McDonald’s restaurants at any time. McDonald’s restaurants are located in freestanding buildings, storefronts, food courts, and other locations. McDonalds has been franchising since it opened in 1955 their headquarters is located in Oak Brook, Illinois.

    Franchise offer: McDonalds offers four types of franchises they include traditional restaurant sites, satellite locations (traditionally opened in malls, airports, universities, hospitals, and other diverse locations), STO (small town oil) and STR (small town retail), and BFL (business facilities lease) franchises.

    Financial assistance: Typically, no financing arrangements are offered by McDonald’s. McDonald’s issues an Operator’s Lease for each site owned or leased by McDonald’s. The Operator’s Lease is a standard commercial lease under which the franchisee pays rent to McDonald’s for use of the premises. The Operator’s Lease does not contain any financing terms.

    Training and assistance: McDonald’s operates Hamburger University, the international training center for the McDonald’s System. The content and duration of all operations courses, which are offered at various local sites, are revised and reconsidered from time to time to meet the needs of the franchisees. All courses and learning events are offered at frequent intervals and are designed to give franchisees specific skill sets required to operate a McDonald’s restaurant.

    Cost to operate: (including additional funds for 3 months of operation)
    Traditional restaurant: low – $1,003,000 high – $1,313,745
    STO and STR locations: low – $814,000 high – $1,313,745
    Satellite location: low – $433,000 high – $745,500
    Other fees:
    Service Fee 4% of Gross Sales.
    Rent Varies.
    Advertising and Promotion Not less than 4% Gross Sales.
    Audit/ Inspection Fee Cost of audit.
    Satellite Annual Fee $500 to $2,500
    Satellite Rent Varies.
    STO Rent Varies.
    STR Rent Varies.
    BFL Rent Varies.
    Relocation Contribution $50,000
    New POS Integration Fee $1,000 integration fee (one-time fee); $500 annual integration fee.
    Restaurant File Maintenance (RFM) Fee $150
    R2 D2 Software Maintenance Fee $125
    New POS Software Fee $1,600 license fee (one-time fee); $400 annual software maintenance fee.
    Cashless Fee $216 license fee (one-time fee); $154 annual maintenance fee.
    Microsoft Subscription License $465
    Endpoint Security Licenses and Managed services $100
    Restaurant System Management (RSM) $250
    Restaurant Integrated Data Movement (RIDM) $75
    Restaurant Fee $54
    Identity Management Fee $75
    Store Mail (email account) Fee $73.80
    PCI Compliance / Security Fee $250
    Restaurant Support Fee $400
    ISP Migration Fee $300
    Digital-(McD US) $900 one-time cost; $390 annually.
    Digital-(McD Corp) $660

    Franchise review: source – https://thebalance.com/mcdonald-s-franchise-review-1350382
    Pros
    • Special Incentive Programs – MinorityFran Participant
    • World Class Training – McDonald’s is recognized as a premier franchising company around the world. Training is required prior to becoming an owner/operator.
    Cons
    • Cost – McDonald’s does not provide financing or assistance other than the special incentives for minorities.
    • No absenteeism allowed – McDonald’s franchises are open only to individuals who are directly involved with the day-to-day operations of the restaurants.
    • Beginning to see a slight decline – In 2012 monthly sales dropped for the first time in nine years. In 2014, quarterly sales dropped for the first time in seventeen years. In 2015, McDonald’s planned to close 184 restaurants in the U.S., which was 59 more than it planned to open, leading to the first time since 1970 that there was a decrease in the number of McDonald’s opened in the United States.
    Average income: An average McDonald’s franchise makes between $500,000 and $1 million in profits per year as of 2013, according to McDonald’s Franchise Disclosure Document. For restaurants open at least 1 year in the United States, average total revenues are $2.6 million.

    Failure rate: In an article from April 2015 several franchisees were asked to rate their experience with McDonald’s 32 of them—representing 215 restaurants—took part in the latest survey by Wall Street analyst Mark Kalinowski of Janney Capital Markets. Many of them complained about poor business that year and blamed corporate executives. When asked to assess their six-month business outlook on a scale of 1 to 5, they responded grimly with an average of 1.81. Maybe that’s because, according to the survey, same-store sales for franchises declined 3.7 percent in March and 4 percent in February.

    Financial qualifications: An initial down payment is required when you purchase a new restaurant (40% of the total cost) or an existing restaurant (25% of the total cost). The down payment must come from non-borrowed personal resources, which include cash on hand; securities, bonds, and debentures; vested profit sharing (net of taxes); and business or real estate equity, exclusive of your personal residence.

    Since the total cost varies from restaurant to restaurant, the minimum amount for a down payment will vary. Generally, we require a minimum of $500,000 of non-borrowed personal resources to consider you for a franchise. There are limited opportunities to enter the program with less cash available (primarily in rural or urban areas), and, in some situations, the financial requirements may be substantially higher depending on the specifics of the transaction. Individuals with additional funds may be better prepared for additional or multi-restaurant opportunities.

    Ranking: Forbes magazine ranked McDonalds as the number one international fast-food franchise with an astounding 18,710 international restaurants
    Business insider named McDonald’s the number one fast-food franchise in a 2015 article with $35.4 billion dollars in sales

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