It’s no secret that McDonald’s is a big name in the food industry. The company releasing a new menu item can cause headlines across the web. That sort of pull causes investors and entrepreneurs to wonder: is McDonald’s franchise cost with the profit potential?
Before taking the plunge into a franchise opportunity, you’ll need to know how franchises work and what makes McDonald’s franchises valuable and profitable.
How McDonald’s Franchising Works
McDonald’s operates under the common practices seen with most franchises. A franchise refers to a business operation where a business owner pays a parent business a combination of one-time and ongoing fees to use the parent company’s branding and licenses to operate as an entity related to that company.
In other words, a franchise creates businesses not started by the parent company, but rather businesses reliant on the parent company for intellectual property and business rights.
Currently, franchised locations make up the vast majority of McDonald’s locations. Over 95% of operating McDonald’s in the United States are franchised locations.
Why Does McDonald’s Do Franchising?
The big reason for McDonald’s to pursue a franchise structure is the revenue it generates for the parent company. The combination of upfront and ongoing fees gives McDonald’s steady revenue to put towards improving its operations and maintaining its market share.
Additionally, franchising allows McDonald’s to spread around without directly investing in opening new locations. Instead, franchise owners take on the risks of opening a new location and operating it. This practice frees McDonald’s to focus on supplying locations instead of having to operate them.
Benefits of Being a McDonald’s Franchise Owner
While franchising offers McDonald’s a great source of income and a way to minimize risks when expanding, franchises can be a great benefit to business owners, too.
In addition to the financial opportunities investing in a business can provide, McDonald’s franchise owners can also count on these upsides when working with McDonald’s:
- The ability to join in with something spanning generations of work and development
- A 60-year track record of operating and supplying successful franchises, leading to knowledge that can be passed down to investors
- Access to training and resources to learn how to open and run a successful franchise from those that came before you
- Connections to a global brand, leading to an in-built recognition and popularity before the business opens
- The knowledge that you partner with a company known for its contributions to charity work
- Access to the innovations and changes that can only happen thanks to McDonald’s size and access to capital
Overall, McDonald’s franchises are a great opportunity to get connected with a business that wants you to succeed and offers resources to do so. Since many folks already know what McDonald’s is, you’ll have an easier time connecting people to your business compared to starting a new restaurant brand.
Costs of Starting a McDonald’s Franchise Requirements
As mentioned, there are several costs to consider when starting up and running a McDonald’s franchise. Here is a guide review of what are the McDonald’s franchise costs and why they cost the amount they do:
Initial Investments
When you first start, you’ll have several costs you have to cover to get your operation going. Each of these investments will be the foundation for one part of your business, meaning you cannot afford to miss out on these investments:
- Franchise fees: The initial fee you pay to McDonald’s will get you into the franchise and connected with the company
- Real estate and building fees: McDonald’s restaurants have to follow specific codes to both meet franchise requirements and meet local restaurant codes for safety and sanitation
- Signs and interior features: In addition to a kitchen to make the food, you’ll also need signage to attract customers and areas for those customers to sit while they enjoy their meal
- Initial inventory: When your business opens, you will need food and ingredients on-site to create the first orders your franchise receives
- Travel expenses: If you live far away from your franchise site, you will want to make regular trips to the site to handle business and check in on construction progress
Altogether, the above costs can total between $1 million and $2 million, depending on where you are in the country and how well construction for the site goes. This doesn’t include the recommended $250,000 to $400,000 kept in savings to help the business get through the first few months of operations.
Ongoing Fees
In addition to initial upfront costs, a franchise can expect to pay ongoing costs to keep the business running.
The first of these is the monthly service. McDonald’s charges this fee as part of maintaining the supply chain and licenses for the franchise location. Every month, you report your gross monthly sales to the parent company. From there, you send out 4% of your sales revenue as a fee to McDonald’s to keep everything running.
Additionally, you will have to leave some money aside each month to cover advertising costs. Despite McDonald’s being a well-known company, you will still need to do advertising and outreach to attract folks. What form your advertising depends on you, but most franchise locations find they spend more than the 4% service fee each month in advertising costs.
Staff and Inventory
Finally, the last recurring costs you’ll have to consider are your staffing and inventory costs.
You will need to staff your franchise location with workers to keep operations moving. Even if you opt for touchpad ordering screens over human cashiers, workers will still be needed in the kitchen and to maintain the business grounds. Expect a moderate amount of money to go to staff each month to keep the place running.
Also, you’ll work with McDonald’s to source your food and equipment for the franchise. McDonald’s has suppliers that work with them to create the foods we know from the restaurant. While part of your service fee goes to this, you’ll have to spend extra to keep things stocked up if your business gets busy.
Revenue for a McDonald’s Franchise
Revenue will be the total amount of money generated by the business every month. This value doesn’t factor in expenses, fees, or profits taken by the business owner. So, ensure you know the difference between revenue and profit when looking at the following figures.
The average McDonald’s franchise location brings in roughly $2.9 million per year in revenue after they have been open for a year or longer. This represents the total amount of food sales generated by the business during the year of operations.
To figure out your profits, you’ll have to subtract your total expenses for the year. The average McDonald’s franchise location costs just under $1.9 million to operate for the year, netting roughly $1 million in profits each year.
Remember, you invested millions of dollars to reach this point. Thus, in the first few years, you will be committing profits to get back to even before you achieve any profit for this investment.
Is a McDonald’s Franchise Worth Anything Once It’s Built?
If you decide that a franchise isn’t worth it for you anymore, you can sell the business to someone else. From there, the individual may decide to continue with the McDonald’s franchise or dissolve the franchise and set up something else at that location.
Based on the average sales figure for a McDonald’s franchise, the business will sell for $984,000 on the open market. This sale price is much lower than the initial investment price because the new owner needs to come in and pick up where your business left off. This can cause issues with operations at the beginning, meaning new owners don’t want to pay high prices to get in.
Should You Invest in a McDonald’s Franchise?
Overall, McDonald’s is one of the more successful businesses right now using the franchise model. As a food service company, McDonald’s offers something everyone needs. Additionally, McDonald’s is a recognizable brand, making it easy to attract customers since they already know what they will be getting.
However, the startup costs are high. You can expect to drop millions of dollars on this venture to start out. In many cases, franchise owners will not earn their money back until five years down the road or longer.
Thus, investing in a McDonald’s franchise only makes sense if you can afford to wait that long. It helps to have a passion for the food service industry since you will need that passion for the first few years of running the franchise.
Summary
McDonald’s franchise opportunities make sense for certain kinds of investors. The high McDonald’s franchise costs and time until the return on investment prevent most investors from entering into a McDonald’s franchise, but the opportunity to see great gains is there.
For those that can put in the effort and resources to start a franchise, McDonald’s can be a way for an intermediate entrepreneur to take their starting capital and grow it into a lifelong business.
