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How To Finance a McDonald’s Franchise

Since 1954, McDonald’s has been serving fast-food burgers and other staples, expanding to the behemoth it is now with about 37,000 restaurants in more than 100 countries. McDonald’s reported $21 billion in sales in 2018.

More than 90% of U.S. McDonald’s locations are owned and operated by franchisees, and the chain offers opportunities to open or acquire a franchise location. However, most applicants who are approved for new restaurant locations are already owners and operators of existing McDonald’s franchise locations.

McDonald’s recommends contacting the company by email to see whether it’s currently in need of new franchise locations in your area. A potential franchisee may need to relocate in order to own and operate a location.

Costs of buying a McDonald’s franchise

  • Estimated initial investment: $1 million to $2.2 million, including a $45,000 franchise fee
  • 25% cash down payment for an existing franchise, or 40% in cash for a new restaurant.

You’ll have to have a significant amount of liquid assets to acquire a McDonald’s franchise. McDonald’s requires a candidate to have at least $500,000 in unencumbered liquid assets in order to be considered.

The initial investment depends whether one is opening a new restaurant or taking on an existing franchise, the size and location of the restaurant, kitchen equipment, pre-opening costs, inventory, landscaping and signage, all of which are paid from the franchisee to suppliers.

Whatever a franchisee cannot pay for with cash may be financed but terms cannot exceed seven years. McDonald’s does not directly offer financing.

Costs of owning a McDonald’s franchise

  • Service fee: 4% of monthly sales
  • Rent: Percentage of monthly sales, decided on a case-by-case basis
  • Advertising: Franchisees contribute to advertising cooperatives

It’s more expensive to become a McDonald’s franchisee than rivals, but the payoffs may be more as well. The average location brings in $2.7 million in annual sales, according to industry publication QSR magazine. McDonald’s says profitability will depend on location, operating costs, financing rates and effective business practices. Companywide revenue dipped 4% in the first quarter of 2019, but sales increased over the same period the year before.

Real estate

A conventional franchise does not own the land, the company does. Franchisees are then required to pay monthly rent. This figure is based on a percentage of monthly sales, and is decided on a case-by-case basis.

Applicants may offer up currently-held real estate properties as potential franchise locations. However, McDonald’s does not leave real estate decisions up to the franchisee. Instead, it has its own site selection process. The company will evaluate the site, acquire the property and construct the buildings. That means applicants may sell their property with the intention of running a McDonald’s franchise, sell the property to McDonald’s and still not be selected to run the location.

Becoming a McDonald’s franchise

Applicants should expect the process of opening a franchise McDonald’s location to take more than a year. Candidates are required to complete a training program that usually takes 12-18 months to complete. Candidates usually complete this training on a part-time basis.

McDonald’s will not work with candidates who are tied to specific geographical locations and does not offer exclusivity to franchisees. That means it’s possible that another McDonald’s franchise could open in your area. Because the chain cannot predict what real estate locations will be available once applicants have completed training, it says candidates should be willing to relocate to operate a McDonald’s location.

McDonald’s works to support potential buyers through the evaluation and acquisition process. It  also provides training programs for applicants. While applicants will conduct sales negotiations directly with an existing franchise owner/operator when buying an existing location, McDonald’s USA, LLC has final approval on the transfer of the location from seller to buyer.

McDonald’s also typically does not allow partnerships between individuals, such as family members, although exceptions may be made. A parent or other individual also may not purchase a franchise for a family member — each applicant is required to apply individually with their own assets. These assets cannot be borrowed funds.

Is a McDonald’s franchise right for you?

The strength of the McDonald’s brand cannot be underestimated. From the golden arches to Ronald McDonald, customers around the world are familiar with the fast-food giant. In fact, only Subway has more locations around the world than McDonald’s. The sandwich franchise has more than 40,000 locations around the world, compared with McDonald’s 37,000+.

Opening a McDonald’s location may pay off significantly down the line as an owner/operator remains in their position for decades at a time — the typical franchise agreement is for 20 years — but there are some drawbacks to opening a franchise with this particular brand.

McDonald’s requires applicants to have at least $500,000 in liquid assets at the time of application. This is high compared with other franchising restaurants such as Chick-fil-A, which requires $10,000 in investment. It’s also higher than Subway, which estimates applicants should prepare to invest $116,000-$263,000 to open a location in the U.S.

When considering opening a franchise location of any kind, it’s important to consider a variety of factors. These include total investment costs, initial fees, ongoing fees, level of support and training from the corporate entity and speed of process. These costs and benefits can vary significantly from one franchise business to another, so it’s important to research multiple options before pursuing any franchise opportunity. The best way to do this is to read the Franchise Disclosure Document (FDD), a legal document required by the Federal Trade Commission. The FDD describes the franchiser’s financial health, franchisee turnover rate, and provides contact information for former and current franchisees.

How to finance a McDonald’s franchise

Owning a franchise can give entrepreneurs the flexibility and independence they crave in operating their own business, while also having the backing of a larger organization. In the case of McDonald’s, that organization is a huge one with wide name recognition, and a company that provides extensive training opportunities.

On the flip side, opening any franchise will require large upfront costs in addition to ongoing fees. Those looking into opening a McDonald’s will need significant liquid assets. Here’s a breakdown of financing a McDonald’s franchise, including ways to secure financing:

Franchisor financing

McDonald’s does not offer direct franchisor financing. It requires new owner/operators to pay 40% of the total new location costs in cash. From there, applicants can seek to finance the remaining 60% from traditional sources like bank loans.

SBA loans

7(a) loans. Entrepreneurs looking to franchise a business often utilize Small Business Administration (SBA) loans. SBA loans are guaranteed by the federal government and are available through SBA-approved banks. This setup guarantees that if the loan recipient defaults on a loan the issuing bank will still recover most or all of its loan funds. SBA 7(a) loan terms range from five to 25 years, and businesses may borrow up to $5 million. Keep in mind that McDonald’s does not allow for financing terms to exceed seven years.

CDC/504 loans. Individuals can also work with the SBA to obtain a CDC/504 loan, which provides small business owners with long-term fixed-rate loans to finance business expansions or modernizations. Borrowers may obtain loans up to $5.5 million to purchase existing buildings, renovate properties and purchase long-term machinery. To qualify, businesses must prove they meet Community Development Goals, such as improving a local economy, stimulating business development or bringing income into a community. Rates may be as low as 4.65%.

Bank loans

Franchisees are more likely to obtain a bank loan than independent restaurateurs seeking traditional financing. From the bank’s perspective, opening a franchise location for a business that has already proved successful — McDonald’s is a prime example — is a far less risky investment. The customer base, brand recognition and proof of profitability are readily available.

Banks will ask applicants to provide financial statements, tax documents and proof that a franchise location will be profitable.

Franchisees may also consider working with alternative online lenders, which tend to be more flexible, but in exchange, will charge higher interest rates and fees.

The bottom line

Opening a McDonald’s franchise can provide opportunities to run your own business, manage a staff and bring in significant revenues. With name-brand recognition and a customer base in place, you may be able to hit the ground running with a steady sales.

The information in this article is accurate as of the date of publishing. 

 

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