McDonald’s Corporation has 38,000 restaurants located in more than 100 countries; 93% of them are franchise operations. In other words, 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. As a result, owning a franchise can be profitable for both the owner and McDonald’s when properly managed.
However, 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 restaurant. The cost of purchasing an existing franchise can reach $1 million or more and a new operation will cost between $1.3 and $2.4 million.
Key Takeaways
- McDonald's franchisee applicants must have a minimum of $500,000 available in liquid assets and pay a $45,000 franchise fee.
- Those looking to launch a new McDonald’s franchise can expect to shell out between $1,314,500 and $2,306,500.
- Existing franchise operations can cost upwards of $1 million.
Initial Costs
The amount of a franchisee's investment depends on whether they are purchasing an existing franchise (most new franchisees take this route) or starting a location from scratch.
McDonald's is unique in that it owns 45% of the land on which its restaurants sit and 70% of the buildings. The rest it leases and all franchisees pay rent to McDonald's on a monthly set amount or percent of revenue basis.
Buying an Existing Franchise
The cost of buying an existing franchise is based on the location’s profitability, renovation needs, and sales volume. In short, franchise prices vary and can be upwards of $1 million. Some existing franchises come on the market as a result of poor performance. For those operations, the price includes McDonald’s planned marketing costs to breathe life back into the location.
In addition to other costs, all potential McDonald's franchisees are required to have $500,000 in non-borrowed personal resources.
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 non-borrowed cash.
McDonald's does not offer financing or lending options. It does have financing arrangements with several national financial institutions.
Buyers can borrow the remaining money–or 75%–of the purchase price from lending institutions. The new owner must pay down the debt over seven years. In rare cases, McDonald's adjusts prospective owner qualifying standards for franchises in urban and rural areas.
Other costs to acquire an existing franchise include:
- One-time $45,000 franchise fee paid to McDonald's
- Monthly rent based on the previous amount paid
- Remodeling costs based on need
- Open inventory: $10,000 to $39,000
- Misc. opening expenses: $46,500 to $58,195
- Travel and living expenses while traveling: $3,000 to $37,100
- Additional funds for three months: $80,000 to $355,000
Pros and Cons of Acquiring an Existing Franchise
An existing franchise is the most popular route, but isn't without risks.
Pros
World-class corporate support, training, and advertising
Established history and customer base
Trained employees available
Potentially lower startup costs than new location
Cons
Possible history of poor performance
Potentially expensive repairs and remodeling
Lack of financing from McDonald's
Owner must be an active participant in the franchise
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. Typically, candidates who are approved to open new locations are existing franchisees with experience owning and operating a McDonald’s restaurant.
Those approved to launch new McDonald’s franchises can expect to shell out between $1,000,000 and $2,300,000 to get the restaurant up and running.
New franchise owners must pay 40% of their investment costs in non-borrowed funds but can finance the remaining costs through various financial services firms with which McDonald's has established relationships.
Costs are similar to those for an acquired existing franchise, but higher.
- One-time $45,000 franchise fee paid to McDonald's
- Monthly rent up to $229,000 per month with 3 months in advance
- Signs, seating, equipment, and decor: $325,000 to $1,550,000
- Open inventory: $10,000 to $39,000
- Misc. opening expenses: $46,500 to $58,195
- Travel and living expenses while traveling: $3,000 to $37,100
- Additional funds for 3 months: $80,000 to $355,000
Ongoing Costs
Franchise owners also pay fees to McDonald’s 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 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.
On the whole, McDonald's franchisees pay about $82% of store revenue to McDonald's each year, according to the Business Model Analyst.
How to Finance a McDonald’s Franchise
Although McDonald's does not provide financing, the company does have financing agreements with several banks, including U.S. Bank. Depending on your initial position as a franchisee, you may need to borrow funds to:
- Acquire a franchise—remember you must have 25% to 40% of the cost in non-borrowed cash.
- Pay the initial three months' rent in advance—McDonald's buys or leases the land and builds the restaurant.
- Remodel an existing location.
- Purchase equipment.
- Other initial costs.
Keep in mind that you must be prepared to pay 25% down on acquisition of an existing franchise or 40% down on the costs of a new location.
Is Buying a McDonald’s Franchise Worth It?
The median annual sales of a McDonald's location in 2020 was $2,908,000. With an average profit margin of 10%, that's an estimated annual profit of $290,800 per location. With an average investment of $1,813,897. it would take a franchisee 8.5 years to recover the investment.
Owning a McDonald's franchise is not for the faint of heart or wallet. With more than 38,000 locations all over the world, the company is one of the strongest, most well-positioned franchise operations of all time. The company has a reputation for serving fast food cheaply. However, the price of admission is steep in both dollars and determination.
Your initial investment will likely be more than $1 million, possibly in excess of $2 million, and your willingness to follow what the company calls the "McDonald's Way" is essential. Entrepreneurs often question the way things are. McDonald's has room for that, but not before you learn and adhere to what's been tried and true.
How Much Does a McDonald's Franchise Owner Make a Year?
According to Glassdoor, an owner of a McDonald's franchise makes between $92,000 and $171,000 annually, with $123,043 being the average.
What Is the Most Profitable Franchise To Own?
The answer to this question varies, depending on criteria, but it's hard to argue against McDonald's, which brings in the most franchise revenue year after year.
- McDonald’s Corporation (MCD)
- Number of Franchises: 39,000
- Initial Franchise Cost: $1.3 million to $2.2 million
- Annual Sales: $100 billion
How Much of a Franchise’s Profit Does McDonald’s Take?
McDonald's keeps about 82% of the revenue generated by franchisees, compared with only about 16% of the revenue from its company-operated locations. It is the company's goal to have 95% of restaurants franchises and 5% company-owned.
The Bottom Line
If you can shoulder the investment costs and live with a rigid corporate structure, the relatively low risk and high-profit potential might make a McDonald's franchise a good move for you.
