Intro to Franchising
Franchising is a popular method for expanding business. Through a licensing relationship a franchisor, or business owner, essentially sells a franchisee the rights to open a new business location. For instance, McDonald’s has many franchise locations, all of which were sold to various franchisees across the country. Once the McDonald’s franchisee purchases a franchise, they are granted the right to build their own location using preexisting systems, regulations, etc.
Franchising is an attractive business model for anyone new (or not) to the industry. Unlike an independent business, which requires growing from the ground up, a franchise comes with a pre-established, and usually successful, operational system. Through extensive training programs, franchisees learn all the ropes behind the business, eliminating the daunting trial and error process. Not to mention, a franchise comes with brand recognition is built right in.
A McDonald’s Franchise comes with a pre-established operational system.
Anyone looking to purchase a franchise will be given a Franchise Disclosure Document (FDD). It’s imperative that any franchisee fully understand the components and contents in any business’ FDD. Consisting of 23 different parts, the FDD, a legally mandated document, outlines different key pieces of information involved in franchise purchase. For instance, a Franchise Disclosure Document tells the interested franchisee more about the total fees and costs associated with purchasing the franchise of their choice.
The overall intention of the document is transparency. Both the company and franchisee need to be on the same wavelength in order for the purchase and future management of the business to run smoothly. Click here to see a more in-depth description and analysis of the Franchise Disclosure Document.
The Story Behind the Business
McDonald’s is one of the best known fast food franchises in the entire world. In fact, it’s hard to find someone that doesn’t recognize the company’s signature golden arches. With locations in about 120 countries, serving 68 million customers each day, it’s difficult to imagine the fast food chain starting from the ground up. Yet, that’s exactly how it all began.
The McDonald’s story begins with Ray Kroc, who, at the age of 52, created a seemingly overnight success. Jumping between different industries at a young age, Kroc went from being an ambulance driver to a piano player, paper cup salesman, and a multimixer salesman. It wasn’t until 1954, when visiting San Bernardino, California, that he happened upon the restaurant of Dick and Mac McDonald. The restaurant did not provide unlimited food options, focusing instead on burgers, fries, and beverages. This method allowed for the McDonald’s brothers to guarantee good quality and fast service.
Kroc saw the small restaurant as an opportunity to franchise and, in collaboration with the brothers, founded the McDonald’s System, Inc., the original McDonald’s franchise. Kroc later bought the exclusive rights to the restaurant’s name and production system.
The franchise grew quickly due to a simple vision that Kroc put forth to prospective franchisees. An impressive salesman, Kroc told franchisees that they would be working for themselves, not for the company, if they bought a McDonald’s location.
Today, McDonald’s has continued with Kroc’s franchising goals, consistently looking for new opportunities to grow. A top franchising company around the world, more than 90% of the restaurants are US owned and run by franchisees, according to the McDonald’s website.
Providing supportive training programs to all franchisees, McDonald’s features many success stories on its website. Franchisees like John Ebert and James Poore both worked in other industries before they decided to purchase a McDonald’s franchise. After they made this decision, however, they both began to develop their own success stories, reaping the most benefit and profit from the opportunity as possible.
Franchising Since 1955
Kevin L. Newell, Chief Brand and Strategy Officer
James Norberg, Chief Restaurant Officer
Lee Renz, Central Division
Rick Colon, East Division
Steven M. Plotkin, West Division
James Collins, US Senior Vice President—Restaurant Support Officer
John A. Kujawa, US Vice President—Global Franchising
According to Item 5 of the McDonald’s FDD, all franchisees must pay a $45,000 initial franchise fee when opening a restaurant. The fee can potentially be refunded if construction of the location is not complete within one year of the Franchise Agreement signing. However, under other circumstances, the initial franchise fee is nonrefundable.
Typically McDonald’s does not offer any financing assistance or arrangements. The McDonald’s predecessor may guarantee loans by a third party lender, however, McDonald’s can make no guarantees.
Training & Assistance
McDonald’s operates Hamburger University (HU), the international training center for the McDonald’s system. With up-to-date courses and manuals, HU ensures that all franchisees will leave the program with full knowledge of the McDonald’s operational system. All franchisees must complete the minimum core training in order to run their franchise location; this is only completed once the franchisee completes the Restaurant Department Management (RDM) curriculum.
The RDM curriculum is deployed through the company’s Learning Management System (LMS), which allows franchisees to track their progress through the course online. Franchisees are also assigned a coach that assists them in any matters related to completion of the training.
McDonald’s does not provide any sort of exclusive area or territorial rights with the Franchise Agreement, nor does McDonald’s guarantee any specific site location. Franchisees may experience competition from other franchisees, depending on their location.
Term of Agreement and Renewal
Generally, the term length for a McDonald’s franchise is 20 years, however this varies according to the type of McDonald’s location the franchisee opens. The franchisor does not guarantee renewal to any franchisee.
Restrictions on Sources of Products and Services
McDonald’s does not require that nay franchisee purchase or lease products, services, or supplies from McDonald’s designed suppliers. However, the franchisor does require that the items placed in the location meet specifications and requirements specified by the company. In fact, McDonald’s does not sell any fixtures or supplies to franchisees. Franchisees are welcome to negotiate their own terms with approved suppliers whenever they see fit.
If the franchisee decides to use a supplier outside of the McDonald’s approved list, the supplier must meet the franchisor’s standards and requirements. Any costs that come with obtaining this approval status is on the franchisee to provide. If the franchisee’s desired supplier is accepted by the franchisor, the acceptance must be forwarded to the company’s Supply Chain Management Department.
McDonald’s reserves the right to refuse a supplier. In situations where the desired supplier does not meet the franchisor’s standards, it is likely that McDonald’s will refuse the request.
Item nine of the franchise disclosure document outlines the franchisee’s obligations in the agreement. The franchisee is tasked with selecting and acquiring the site on which the franchise will be located. They are also required to complete initial and ongoing training, while keeping up with all fees and payments.
All franchisees are required to comply with McDonald’s regulations and standards, as laid out in the operating manual. Franchisees are also required to meet sales quotas and territorial development requirements.
At the end of 2012, McDonald’s had a total of 14,151 outlets throughout different nations.
Initial Investment and Costs
|Name of Fee||Low||High|
|Initial Franchise Fee||$45,000||$45,000|
|Real Estate and Building (3 months rent)||$450||$310,500|
|Signs, Seating, Equipment, and Decor||$722,600||$1,385,500|
|Miscellaneous Opening Expenses||$60,300||$61,600|
|Travel and Living Expenses while training||$3,000||$26,450|
|Additional Funds (3 months)||$186,000||$322,000|