How McDonald's can be good for you

I’m not sure how McDonald’s managed to lodge itself inside my children’s brains.They will behave for the reward of a Happy Meal. My maternal guilt is high, but that’s how we survive long car journeys. I’m still unsure how the McDonald’s indoctrination occurred as their school and home are ad free zones.

McDonald’s is one of the most powerful brands in the world and chooses a franchise model of operating. 90% of their US restaurants and 70% of their UK restaurants are run by franchisees.

They pursue the “owner-operator” model of growth, where if the person who owns a large part of the restaurant also operates it, both McDonald’s and the owner-operator franchisee are very incentivised to grow the business.

I’ve had friends who have invested in a variety of franchises and I was curious about the numbers behind investing this way. Since McDonald’s is the best known and probably the best player at the franchise game I did a quick research project on investing in a franchise with them

To get started in the UK you’d need a minimum of £100,000 and in the US $500,000 of non-borrowed personal resources. You’d also have to be exclusively with McDonald’s.

There is a monthly percentage fee based on sales and profitability of about 10-18%, a 5% service fee for using the McDonald’s system and in the UK a 4.5% of sales contribution to advertising. That’s before you buy all the food from them!

It’s hard to come by profitability data but it looks like McDonald’s leads the pack with a net profit margin of about 22% in 2017, but most franchises fare much worse with competitor Burger King at 6%. The average franchise generates $66k in net profit a year with McDonald’s leading the pack at $150k. Keep in mind though that a McDonald’s is very expensive to purchase, running into the millions.

Is franchising worth it if you want to be an investor/ entrepreneur? It’s less risky and you’re following a proven business model versus starting your own company. If you’re tempted take a look at chapter 15 on buying a small business in Eric Tyson’s “Investing for Dummies”.

On the other hand, the next time McDonald’s shares drop 10% or 20%, buy as many McDonald’s shares as you can afford. That way you access all the expertise and growth without much work at all. If in doubt, turn for help to the nearest competent value investor near you!

Thanks,

Mallika