Buying a McDonalds Franchise - Obtaining the McDonalds FDD
The most successful franchise system in the world, McDonalds captures the minds and imaginations of a big sllice of humanity. How much does a McDonalds franchise cost? What kind of profits does a McDonalds generate? How does one buy a McDonalds franchise? This article provides the answers.
Authorities reported a 27-year old woman in the State of Florida called 9-1-1 not once, not twice, but three times after McDonalds' employees told her they ran out of Chicken McNuggets. Although the woman was cited for abusing the 911 emergency network, the incident shows just how deeply ingrained the Mighty Mac is in our national psyche. With over 30,000 locations and fifty years in the burger business, the McDonalds brand is the most recognized and successful franchise in the world. Not surprisingly, before considering anything else many would-be franchise owners ask themselves questions like: How much does a McDonalds franchise cost? How can I buy a McDonalds franchise? They hear a McDonalds makes a lot of money and the cost to buy a Mighty Mac franchise is $45,000, an investment that's quite within their franchise affordability range.
The McDonalds Franchise Fee
As with most things in life, a little information is a dangerous thing. While it's true McDonalds charges a $45,000 franchise fee, this is only the initial franchise fee for licensing rights - the upfront fee charged to join the network and access the McDonalds System. There's a LOT more financial commitment and cost involved to buy a McDonalds franchise after that. On top of the investment, there are other franchise qualifications to being a McDonalds franchise owner besides just having the money. Things like community involvement, non-food background, business sense, common sense, etc.
Different McDonalds Franchise Ownership Options
According to McDonalds, there are two options to buy a McDonalds franchise and enter their system. The first, and most frequently used method is purchasing an existing restaurant, either one operated directly by McDonalds (company-owned) or an existing McDonalds franchise that's up for sale by a McDonalds franchise owner/operator. The second, infrequently used way is obtaining franchise rights for a brand new McDonalds restaurant. Let's consider these in reverse order, since McDonalds provides few financial details on the first, most frequently used method.
Buying A New McDonalds Franchise
For franchise licensing rights to a new McDonalds, the company charges its standard $45,000 initial franchise fee. The second cost category associated with establishing a new McDonalds franchise is "Equipment and Pre-Opening Costs." According to McDonalds, the total on thse costs range from $995,000 to $1,842,700. So, basically a McDonalds franchise is a $1 million to $1.8 million initial investment. Per McDonalds, the factors impacting new restaurant costs are: size of the McDonalds restaurant facility, area of the country, pre-opening expenses, inventory, selection of kitchen equipment, signage, style of decor and landscaping. A detailed breakdown of the initial investment costs into discrete categories, including a working capital component, is provided in Item 7 of the 375-Page McDonalds FDD - Franchise Disclosure Document. Franchised owner/operators must pay forty percent (40%) of the total cost from liquid, personal assets and may finance the remainder from traditional lending sources. So, even if you are fortunate enough to hit the low end on everything, you need at least $400,000 in liquid, personal assets and the ability to raise another $600,000 from lending sources.
Buying An Existing McDonalds Franchise
What about the most frequently used method of buying a McDonalds franchise - purchasing an existing restaurant from a current McDonalds franchise owner or one that's company-owned by McDonalds and sold as a "turnkey franchise"? Unfortunately, details about how much this type of McDonalds franchise costs are not specified, other than the following statement:
"The purchase price of an existing restaurant varies and is dependent upon a number of factors including sales volume, profitablity, occupancy costs, reinvestment or improvement needs, competition and location."
To get a better handle on this statement, when existing, "turnkey franchises" are sold in any industry (McDonalds franchises included) the purchase price reflects the value of the business as a going concern, generating (in the case of McDonalds) $X million in sales and $Y six-figures in profits. A typical McDonalds restaurant that's been operating for at least one year generates over $2,000,000 in annual sales, with profits in the low six-figure range. I estimate the sales price of an existing McDonalds franchise (or company-owned restaurants sold as turnkey franchises) to be in the $2 million to $6 million range, plus or minus. Twenty-five percent (25%) of the purchase price must come from liquid, personal assets and the balance can be financed from traditional lending sources. So, if you are buying an existing McDonalds franchise for $4 million, you will need $1 million in liquid personal assets and the ability to raise another $3 million to cover the total purchase price.
Ready to get out your checkbook? Even if you are, there's a lot more franchise qualifications for obtaining a McDonalds franchise than just having the investment capital.
The McDonalds Franchise - Item 19 Financial Performance Representations - Cost of Sales, McDonalds Gross Profit and Operating Profit
According to the McDonalds FDD Item 19, the average sales volume of traditional restaurants in the U.S. open at least one year was $2,311,000 in 2008. The highest sales volume for a U.S. McDonalds in 2008 was $9,552,000 (the "star" performer). The lowest performing McDonalds clocked in at $491,000. Item 19 of the McDonalds FDD goes on to list proforma financial results for restaurants that hit three different sales levels - $2 million, $2.2 million and $2.4 million, showing cost of sales, gross profit and operating profit at each level. Unlike other franchise companies with similar investment levels, McDonalds steps up to the plate and provides detailed franchise earnings information in Item 19 of its FDD. Other franchise companies "elect" to say nothing in Item 19 ("Where are our badges? We don't need no badges. . . We don't have to show you no stinking badges." - line from John Huston's 1948 classic movie "The Treasure of the Sierra Madre"). Jumping into a big, black hole never makes any sense, except to unscrupulous franchise companies that are not as forthcoming as McDonalds.
Getting the 375-Page McDonalds FDD
If you would like to get a copy of the entire McDonalds FDD (or just particular sections of the FDD, like Item 19 Financial Performance Representations or Item 7 Estimated Initial Investment or one of the exhibits to the FDD - like the actual 15-page McDonalds franchise agreement to review and get further information, send us an email for best pricing on the net by clicking on the link at the bottom of this page. You can pay by major credit card, check or through PayPal. The 375-page McDonalds FDD is a treasure trove of information about the franchise program, relationship, the McDonalds investment, the McDonalds franchise training program, cost of sales, gross profit and operating profit of McDonalds franchises, etc. The FDD also contains 3 years of audited financial statements on the franchise entity offering McDonalds franchises and a list of McDonalds franchise owners. Also attached as an exhibit to the FDD is the actual 15-page McDonalds franchise agreement. Their franchise contract is a much smaller (and fairer) contract than most others used in the franchise industry.
For an informative franchise article about the rise of the McDonalds franchise chain, go to the Franchise Foundations (www.franchisefoundations.com) franchising articles page - History of Franchising - McDonalds, KFC etc. It includes details about the original owners, the McDonald brothers, and how they applied Henry Ford's assembly line production techniques to the burger business. Just by chance, they happened to meet Ray Kroc, a multimixer milkshake salesman, who provided the franchise strategic vision to grow the business via franchising, something the McDonald brothers were not interested in considering or pursuing. Kroc went on to build the McDonalds franchise empire. There's also information about another franchise strategic vision - McDonalds McCafe concept. Started and refined overseas, the McCafe concept is now storming the U.S. market. McDonalds is successfully slugging it out with Starbucks, landing body blows and capturing critical market share. McDonalds sales and profits grow, while Starbucks closes many hundreds of locations.
McDonalds in China
Not apparently impacted by the current recession, McDonalds sales and profits continue to rise in the U.S. and in international markets. While other companies are laying off employees in droves, in April, 2009 McDonalds announced hiring 10,000 new employees. The bad news is all the hiring is taking place in China, an international market McDonalds targeted in the 1980's as yet another component of its strategic franchise vision. The first McDonalds restaurant opened in Shenzhen, China in 1990. With it, China became the 53rd country to have a McDonalds outlet within its borders. Buoyed by the success of its Shenzhen restaurant, the second - a Mega-McDonalds with 28,000 square feet - opened in Beijing in April, 1992. It attracted 40,000 customers on opening day. McDonalds growth in China continued steadily and pervasively. In 2004, the Mighty Mac launched McKids in China, selling clothes, toys, games, DVD's and books throughout it's chain that had grown to 600 restaurants serving loyal Chinese residents. As of 2008 that number mushroomed to 960 McDonalds restaurants and over 60,000 employees, making China the largest growth market for McDonalds. The McDonalds strategic vision in China continues to focus on core menu extensions, convenience and value.
Check the Franchise Foundations website (www.franchisefoundations.com), McDonalds Franchise page, for updates on other details about a McDonalds franchise investment and how to obtain the McDonalds FDD.
Copyright 2009, Kevin B. Murphy
By Franchise Foundations, APC - Kevin B. Murphy, B.S., M.B.A., J.D.ABOUT THE AUTHOR: Kevin B. Murphy, B.S, M.B.A., J.D.
Franchise Attorney and Expert Witness
Franchise Attorney and Expert Witness
Mr. Murphy, a San Francisco franchise attorney is an internationally-known franchise expert, author, and instructor - known in the industry as Mr. Franchise. For over two decades he has specialized exclusively in the franchise industry and owned a very successful franchise in the home improvement field. He has written over 40 publications, including four books on franchising and one book on trade secrets. He instructs franchise company personnel in best franchise practices and teaches franchise, licensing and intellectual property courses to attorneys. Mr. Franchise is a franchise attorney and Director of Operations for Franchise Foundations, a San Francisco-based professional law corporation.
Copyright Franchise Foundations, APC - Kevin B. Murphy, B.S., M.B.A., J.D.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.