McDonald’s is the quintessential American fast-food chain restaurant. It was founded in 1940 as a restaurant operated by Richard and Maurice McDonald in San Bernardino, California, United States. The restaurant chain sells hamburgers, chicken nuggets, french fries, milkshakes, and ice cream and has over 38,000 locations in over 100 countries around the world.

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00:00 Introduction
01:14 Locations
01:40 Initial Investment, Franchise Fee, Service Fee & Advertising and Promotion Cost
02:07 Time to Recoup Investment
02:30 Total Revenues & Net Income
03:33 Units Opened & Closed
03:55 Conclusion

#IsMcDonaldsFranchiseCostWorthTheProfitPotential #McDonaldsFranchise #VettedBiz

McDonald’s has been a franchising company since 1955 and has relied on its franchisees to play a major role in the system’s success. Currently, about 95% of all U.S. restaurants are franchised to independent franchisees and about 5% are company-owned.

Chris Kempczinski is the current President and Chief Executive Officer of McDonald’s Corporation. He joined the company in 2015 overseeing global business strategy, business development, and innovation. He also previously served as the President of McDonald’s USA and was responsible for the business operations of approximately 14,000 McDonald’s restaurants in the US.

McDonald’s is the leader in the fast-food industry with its large presence around the world stage. It faces competition from other fast-food chains like Burger King, Wendy’s, and Five Guys.

The total investment to begin operation of a traditional McDonald’s franchise ranges from $1,314,500 to $2,313,295 which includes an initial franchise fee of $45,000 that must be paid to the franchisor.

Requirements to open a McDonald’s Franchise
Significant Business Experience:
Business plan
Good Credit History
Manage finances well

Service Fee: A monthly fee of 4% of gross sales

Advertising and Promotion take more than 4% of gross sales

The median annual sales volume of franchised McDonald’s restaurants open at least 1 year as of December 31, 2020, was $2,908,000.

Using the median annual sales and the midpoint investment of $1,813,897 we calculated the time it would take you to recoup your investment and below are the results of our analysis.

With a profit margin of 10% or more, it would take about 8.5 years or less to recoup your initial investment.

When you go to sell a McDonald’s franchise based on the median multiple of 0.34 and net sales of $2,908,000 in 2020, it would sell for $988,720. This is lower than the midpoint initial investment of $1,813,897 by about $800k.Your business would therefore sell for less than your initial total investment.

However, with net sales over $5 million, the median multiple increases to 0.86. Hence, owning multiple franchises whose average net sales are over $5 million would yield a bigger income. For example, if you own 10 outlets, the estimated net sales would be about $29,080,000. With a sell median multiple of 0.86, the resale value of this multi-system business would be $25,008,000 which is higher than the estimated initial investment of $18,138,970. The business will therefore be worth over $6 million more than your initial investment.

To the franchisor, McDonald’s is a very profitable business with an average annual net income of over 2 billion dollars. The average net income of 2020, 2019, and 2018 was $2.338 billion. Franchised restaurants generated the highest revenue averaging about $5 billion annually. The high net incomes are a testament to the success of the McDonald’s franchise business.

McDonald’s reported positive cash and equivalents at the end of 2020, 2019, and 2018 averaging about $47.6 million. McDonald’s cash flow statement, therefore, indicate that the business manages their investing and financing activities appropriately which is a sign of healthy financials.

At the end of 2020, there were 13,022 franchised outlets. A total of 163 outlets closed down in 2020 and 44 closed down in 2019 unlike in 2018 where there was a net increase of 84 outlets. The 2020 closures could be attributed to the negative economic effects of the Covid19 pandemic which led to most franchisees not renewing or extending the franchise at the end of the specified term. Also, the closures could be as a result of a mutual agreement during the franchise term.

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