Eighty percent of McDonald’s Corp.'s (NYSE: MCD) 36,000 restaurants are franchise operations, according to the company, meaning that many entrepreneurs have chosen to make a living under the shadow of the ubiquitous golden arches. McDonald’s is a powerful brand, with many stores earning well over $2 million in sales annually, so owning a franchise can be profitable for the owner and McDonald’s when properly managed. Prospective franchise owners are well-advised to get their financial ducks in a row before applying to launch a new McDonald’s franchise or buy an existing one.
Buying an Existing Franchise
McDonald’s has been around for more than seven decades, and many franchises have been established in that time. For this reason, the vast majority of entrepreneurs wanting to get into the restaurant franchise business buy existing franchises rather than launch new ones. Existing franchises typically come with trained staff and built-in customers, so, in that sense, these are true turnkey businesses.
The cost of taking ownership of an existing franchise is based on the location’s profitability, renovation needs, and sales volume. In short, franchise prices vary and may be upwards of $1 million or more. Some existing franchises come on the market as a result of poor performance, and, as such, the price includes McDonald’s planned marketing costs to breathe life back into the location. The amount of competition in an area, including other McDonald’s franchises and competitor restaurants, also plays a role in an existing franchise's price. McDonald’s requires prospective buyers to have 25% of the purchase price of an existing franchise in cash. Buyers can borrow money from lenders to pay the remaining 75% of their franchise purchases and pay down the debt over seven years. In rare cases, McDonald's adjusts prospective owner qualifying standards for franchises in urban and rural areas.
Building a New Franchise
In some cases, McDonald’s approves the opening of new franchises in regions where the company wishes to enter the market, which is also considered "buying" a franchise. Those approved to launch new locations are expected to pay a range of costs including inventory, equipment, and any expenses incurred in preparing to open the location, including construction, signage, hiring, and training. Franchise owners also pay the costs of the restaurant's interior decor and exterior landscaping, as well as all vendors and contractors needed to build the new restaurant.
Those approved to launch new McDonald’s franchises can expect to shell out between $958,000 and $2,183,000 to get the restaurants up and running, depending on various factors. For example, the region of the country and store type influence the total cost. Restaurant size also impacts the cost an entrepreneur pays to open a new location.
Owners pay an initial franchise fee of $45,000. Unlike people buying existing franchises, those approved to launch new locations must pay 40% of the total cost upfront and must have $500,000 in non-borrowed liquid assets, as of publication. The owner can borrow the remaining 60% of the needed funds and repay it over seven years.
Additional Costs and Financing
Franchise owners also pay McDonald’s fees on an ongoing basis. They must pay a 4% monthly fee, which is based on their restaurants' sales performance. Owners also pay the monthly rent to McDonald’s based on a flat fee or percentage of sales.
Whether buying an existing McDonald’s franchise or building a new one, buyers can shop around to get the best interest rates on loans. Some lenders specialize in franchise loans and offer repayment terms longer than seven years, depending on how the owner plans to use the money.