Definitive Guide to Starting a McDonald’s Franchise
When I was a kid, I dreamed of being a McDonald’s franchisee. Well that might be an exaggeration – but it was definitely up there with being a farmer, or working on an oil rig.
And I doubt I was the only one. For many a prospective franchisee, opening a McDonald’s franchise is the obvious choice. It’s a powerful global brand with cheap and highly convenient fast food . Red eye arrival into JFK airport? Check. Quick and easy Saturday lunch? Check. Stopping by for a photo op while canvassing for votes? Check. Its burgers taste pretty good, its low prices make it recession proof, and its staff always look busy! That means a lot of money, right?
In short, yes, it does. But like any investment you make, you need to know exactly what is required and what your rate of return is likely to be. In this guide, we’ll take you step-by-step through everything you need to know before you dive into running your own McDonald’s restaurant.
If you want to cut to the facts and figures, you can skip directly to the Key Franchise Terms and Conditions.. Note that all figures in this article and website are provided on a best efforts basis, and are based on information provided in the 2019 franchise disclosure documents. We do not accept liability for any damage, loss, liabilities, or injury incurred.
What is ‘McDonald’s franchising?
Great question. McDonald’s has been franchising since 1955. It started selling hamburgers for 15 cents in 1948 and has grown to more than 37,000 locations in over 120 countries, with about 13,000 outlets in the US alone.. Wherever you are in the world, you should be within just a few miles of a McDonald’s restaurant (and if not, you soon will be). Even Guantanamo Bay has one, but this is only for service men and women – don’t go knocking asking to be served!
McDonald’s is the top dog of the restaurant franchising world, with almost twice as many US outlets as its nearest competitor Pizza Hut.
Most people who buy a McDonald’s franchise purchase an existing restaurant or site either from the fast-food giant directly, or by buying-out another franchisee. But it is also possible to set up a new franchise restaurant from scratch. Unlike most franchises, McDonald’s will acquire the real estate and build the restaurant for you. So, while you may own the franchise, McDonald’s HQ owns the real estate, which you then rent. This is why many people argue that McDonald’s is part global fast food brand, part real estate investment trust. Their real estate footprint is enormous.
What do I need to get started?
McDonald’s is a relatively exclusive club, meaning you need to show you have a good credit history and a significant amount of successful business experience. McDonald’s prefers its prospective franchisees to already have experience running a business, at least in some capacity. It’s understandable when you are expected to manage up to 125 employees per restaurant. If you’ve owned a business before, or run a department, you’ll likely qualify.
McDonald’s wants individuals who have a track record of growing consumer-facing businesses, managing financial responsibilities, and managing people at all levels of the business. This ranges from the chap who manages your procurement to the guy who keeps missing that spot with the mop! To join as a franchisee, you need to complete ongoing and extensive training at McDonald’s and work at a local franchise to learn the ropes for nine to 18 months before taking on your own franchise. Rumour has it you also need to finish a Big Mac in less than a minute. (Just kidding, it’s actually 30 seconds.)
There are also strict financial requirements. Some are publicly disclosed but we suspect there are more that we’ve not been able to verify yet. At the bare minimum, you need to pay an initial fee and make a down payment to cover the set up costs. McDonald’s requires their prospective franchisees to have at least $500,000 of liquid assets. “Liquid” means they must be readily available to convert into cash – things like:
- Cash savings
- Real estate (not including your primary residence)
- Public equities
It’s a lot of money to have lying around but it’s actually on the low side compared to other franchises.
What does it cost to get started?
Like any franchise, to play the game, you need to pay. This starts with an initial franchise fee. For franchises in general it ranges from $5,000 to $50,000. As McDonald’s is a premium brand it comes in at a hefty $45,000. Unlike the liquid asset requirement, the $45,000 initial fee is quite high compared to similar franchises.
Remember to ask if there are discounts available for veterans – we have heard this may be the case.
But this is just the tip of the iceberg. There are a plethora of other costs required to get a unit up and running. The total initial investment cost varies significantly – from a minimum of $1,003,000 to a maximum of $2,228,000 (inclusive of the initial fee).
Sadly there is no way to avoid this as it includes all the initial expenses you can imagine a restaurant would need. There’s inventory (think burger buns, fries, and meat patties), equipment (deep fat fryers, tables and chairs), property expenses, hiring, and training. The minimum initial investment cost is broadly in line with other major fast food brands like Burger King and KFC, but way above Chick-fil-A, Pizza Hut, and Taco Bell.
If you’re looking to pick up a major fast food franchise on the cheap, you can probably stop reading. McDonald’s units tend to be have more square footage, and kitted out to a higher spec. This means they require much more upfront investment, even for a small unit.
The McDonald’s maximum investment cost is broadly in line with other fast food franchises.
But don’t worry, you won’t be expected to finance the initial investment cost entirely from your own savings. Depending on your situation, there are a host of specialized lenders hungry ( pun intended) to lend to McDonald’s franchisees. McDonald’s imposes its own rules on how much you can borrow to finance your franchise. The key thing to note is you need to cover 40% of the initial investment (i.e. 40% of $1m to $2m). If you buy an existing franchise, you can borrow up to 75% of the cost. McDonald’s likes to ensure you have plenty of crispy skin (aka money) in the game.
What about those ongoing fees?
There are a number of fees which franchisees must pay to McDonald’s and other vendors every month. The most significant ones are:
- A 5% service fee on gross monthly sales – this is the all important royalty fee McDonald’s stockholders love.
- Your monthly rent for the premises – this varies by location but is approximately 10.7% of sales, according to the Service Employees International Union (see Item 6 in the Franchise Disclosure Document for more info). Note that rent as a percentage of revenue escalates in line with the initial investment.
- Loan payments and interest – imagine borrowing $1.5m at an interest rate of 5% and you can see how quickly expenses add up.
- Advertising and promotion – 4% of gross sales.
- Other enterprise fees, including things like cashless integration, back office support, security, point-of-sale integration and audit fees.
The chart below compares McDonald’s franchisees’ two largest recurring expenses, the service fee and advertising fee, against comparable franchise opportunities. Overall, it is bang smack in the middle.
How much revenue does an average McDonald’s franchise make?
What kind of money are McDonald’s franchisees making?
- Average annual revenue in 2018 was $2,857,000
- 58% of the 9,886 independent franchises surveyed made an annual revenue of $2.6m
- 79% had revenue in excess of $2.2m
While the majority of franchisees hover in the above revenue range, there are outliers. The franchise with the highest revenue in 2018 earned $12,457,000, and the lowest $557,000. We would love to know which branch is pulling in more than $10m – our guess is the one at Disney World.
It’s important to remember that as a franchise owner you won’t get a salary from McDonald’s. Instead you can pay yourself a dividend from the surplus profits (or just eat all the wrong orders!). Or, even better, use the proceeds to buy a few more units.
How much profit does an average McDonald’s franchise make?
Of course, with such a high investment and time commitment, there have to be some pretty outstanding profits on offer, right? For the most part, yes. In 2018, more than 55% of the 9,886 US franchisee-owned McDonald’s restaurants surveyed had an operating income of more than $686,000, and 74% had more than $546,000.
This operating income excludes occupancy costs, depreciation and amortization (the financing costs of your tangible and intangible assets), interest and income taxes. The depreciation, amortization, and interest will vary depending on the purchase price and reinvestment required. See Item 7 of the Franchise Disclosure Document for more info.
If we do some back-of-the-envelope calculations and assume average operating profit is $650k, and average initial investment is $1.5m, then your typical franchisee is generating an operating income return on investment (i.e. operating income divided by initial investment) of about 45%. Pretty good, huh? Your payback period is just two to three years! Well, not so fast!
Operating income excludes occupancy costs – and McDonald’s units tend to be in busy areas where rent is high. Restaurants typically spend five to10% of revenue on rent. So you can knock another $300k (plus or minus 10% of $3m revenue) off operating income to get to a more realistic EBITDA figure (Earnings Before Interest, Tax, Depreciation and Amortization).
Once we exclude occupancy costs, average franchisee EBITDA is probably close to $300k, which is still an attractive 20% EBITDA return on investment (ROI), and a payback period of plus or minus five years. Ongoing capital expenditure will reduce the ROI even more.
What support does McDonald’s offer their franchisees?
McDonald’s is an extremely supportive parent company that stays in regular contact with franchisees – some might say a little too regularly. As well as requiring all new franchisees to complete extensive training, quality controls are extremely high and there is a process for everything. If you’re looking for a lot of freedom in how you run your business, you might want to look elsewhere.
How can I get advice from a McDonald’s franchise owner?
Speaking to local franchisees is a no brainer, and we highly recommend you reach out to established owners nearby to get the inside scoop on what running a franchise is really like. You can find a detailed list of McDonald’s franchise owners here: McDonald’s Franchise Owners List.
Try calling a few to see if any are happy to speak. It’s not as awkward as it sounds but don’t forget to be brief and polite – they’re busy people too.
Before you pick up the phone, have what you want to say in mind, ask when is a good time and suggest a few dates. Tell them it’ll only take an hour and do your best to stick to that. And if you get along, why not trade numbers and offer to keep in touch to share what you both learn?
What are the next steps?
If you’re serious about becoming a McDonald’s franchisee then it’s a good idea to first read through the McDonald’s Franchise Disclosure Document – this is a formal legal agreement which will govern your rights and responsibilities. Needless to say, it’s incredibly important. Don’t let the length put you off – a lot of it is legalese, but you should definitely consult your trusted advisor to make sure you understand the key points. If you’re a visual person, you can also search YouTube to get a flavor for life as a franchisee – here is a great video from Mashed. If you’re still interested, it’s time to find out more directly from the source. You can learn more about acquiring a McDonald’s franchise on their website.