Why You Will Go Broke Owning a McDonalds Franchise - YouTube

You’re done with the rat race and ready  to start living your dream - owning  

your very own McDonald’s franchise.  Not only will you be your own boss,  

dishing out Happy Meals and Big  Macs to all the Mickey D’s fans,  

but you’ll have all the fries you could want  right within reach. What could go wrong?

Well, for one thing, opening a McDonald’s  franchise costs money. A lot of money.

McDonald’s is one of the biggest  chains in the world, with over  

37,000 stores across a hundred countries  serving a shocking 69 million customers a day.  

Not only are they the biggest name in fast  food in most countries, but they can be found  

anywhere people are passing by - in malls, train  stations, airports, and office buildings. They’re  

even the second biggest private employer  in the world, with over a million and a  

half people wearing that distinctive uniform.  They have a brand and an image to preserve.

And that means joining the  family isn’t going to be easy.

From the start, McDonald’s wants to make  sure you’re going to be able to carry the  

costs of a franchise. With a franchise,  you own the restaurant and can make your  

own decisions as long as you abide by some  basic regulations for representing the larger  

corporation. So you won’t be answering to a  boss on the regular - but they want to make  

sure you’ll represent them well. That means no  one who’s going to go bankrupt in a few months.

Which is why the door has a pretty big entry fee.

Before McDonald’s will even consider you for a  franchise, they’re going to want to do a deep  

dive into your personal finances. If you have less  than half a million dollars of personal resources,  

you probably shouldn’t even apply - although  there are limited opportunities if you have  

a good argument for an alternative. But there’s  a good reason why McDonalds’ wants to know your  

resources before you start - they want to  make sure you can afford the down payment.

And that’s where your first big choice comes in.

Do you want to build a new McDonald’s from  scratch? This will take more resources,  

including retrofitting an existing building  with all of the usual McDonald’s treats and  

tricks you love. The costs will vary - turning  a former Burger King into a McDonald’s will  

take less resources than turning a bank  or shoe store into a fast food restaurant,  

but the company will generally want 40% of the  total cost paid up front before they break ground.

But if resources are a little  tight, there’s another option.

Do you have an old McDonald’s in your  neighborhood? Do those old arches haunt  

your memory, calling back to when you could  get your McNugget fix in a five-minute walk?  

If you take over an existing restaurant  that’s still functioning or recently closed,  

you can get a discount on the down payment -  only 25%. Is this a good buy? That depends on  

why the restaurant closed. If it fell prey  to a recession, go ahead. If it went viral  

for that iconic Hash Brown Rat video on social  media, it may be more trouble than it’s worth.

But the payments don’t stop there.

McDonald’s has to get something out of  the deal. So once you sign the contract  

and open your restaurant, you’ll be paying  them going forward in two ways. You’ll be  

responsible for a 4.0% service fee based on  your restaurant’s sales performance, as well  

as rent. Rent is judged as a flat percentage  of your sales, and these two fees usually  

don’t change over the course of your contract,  so make sure that’s baked into all your plans.

At least once that’s taken care of,  you’re cleared for takeoff, right?

Not quite. Running a McDonald’s franchise  is a lucrative business - the average gross  

profit in the United States is around 1.8 million,  

which means there are a lot of people ready  to get their McMuffin fix every morning.  

But with great profits come great responsibility  - and running a McDonald’s franchise comes with  

a whole lot of hidden costs that can take even  the most successful franchise owner by surprise.

And it starts before you open your doors.

The startup costs of a McDonald’s franchise are  high, averaging just under a million on the low  

end, and over two million on the high end.  This depends on what kind of facility you’re  

taking over, what size the restaurant is,  and how much you have to build from scratch.  

McDonald’s likes things standardized,  so even an already-equipped restaurant  

will have to make sure everything about  it fits the parent company’s standards.

And that includes its franchisees.

Do you wish you could go back to school?  

McDonald’s will make that dream come true - but  you won’t be attending frat parties. Before the  

Golden Arches will trust you with the keys to  one of their franchises, they’re going to put  

you through training. All franchisees are required  to complete a formal training program that takes  

about twelve to eighteen months part-time  before they’re allowed to sign that contract.

And you’re not the only thing  they’ll want to whip into shape.

Before a new McDonald’s will open, the  company will want to make sure every  

part of the building is up to par.  That includes the kitchen equipment,  

which has to be configured specifically for  the company, the signs outside, and even the  

landscaping! After all, no one is going to want to  go to a McDonald’s that has shabby grass, right?  

Well, maybe - who looks at grass  when they’re on a McNuggets run?

But there’s one area of construction where  McDonald’s is more particular than ever.

The kitchen at a McDonald’s is a well-oiled  machine. The company only sells a limited  

number of items on its tight menu, usually  old favorites. New items come and go,  

but they don’t always stay - as anyone who loved  those short-lived fish tenders knows all too well.  

But with a limited roster, the kitchen is designed  to cook them to perfection in short order.  

That’s why McDonald’s will want to make sure  any franchisee has the proper grill that cooks  

those burgers at the right temperature, a fryer  that can handle the capacity of all those fries  

and nuggets, and a drink machine that will  keep pumping out the coke for thirsty diners.

But at least there’s one thing we know about  McDonald’s - everything stays the same. Right?

Wrong! And that’s where the biggest hidden  costs of owning a McDonald’s franchise come in.  

Because like any big company, McDonald’s  is constantly experimenting. Sometimes  

they’re introducing a new sandwich  or flavored nugget. Sometimes they’re  

completely overhauling their beverage program.  Sometimes they’re experimenting with faster,  

digital-era ways to order. And when  they hit upon an invention they like,  

they want it to be reflected across the line  so when people go into a McDonald’s anywhere,  

they can expect the newest and best. And that  means it’s time to upgrade across the board.

And guess who pays those upgrade fees?

This has happened many times over the years,  with one of the most significant upgrades  

being the introduction of the McCafe espresso  machines. This was McDonald’s attempt to compete  

with high-end coffee shops like Starbucks.  Suddenly you didn’t have to settle for a  

standard hot cup of McDonald’s coffee with  your McMuffin. You could have a refreshing  

iced coffee or a frothy sweet drink. And  all it cost was...a whopping $13,000 for  

each franchise owner to bring in one of the  most advanced coffee-making machines around.

Even smaller changes can add up.

Remember when McDonald’s introduced those  tasty little muffins? Those required their own  

equipment, which cost each franchise over $4,000.  But even changes that don’t seem to require new  

equipment can add up. Every McDonald’s fan around  celebrated when all-day breakfast was announced.  

Finally, those dreams of having a sandwich made  of McNuggets between hash brown patties could  

come true. But while all the equipment for  both breakfast and lunch was already there,  

having them coexist meant some changes.  All-Day breakfast meant more capacity  

was needed to prepare both at the same time,  and that took some retrofitting of existing  

kitchens. Lucky franchisees only put in about  $500 into these changes, but some older and  

smaller McDonalds’ wound up shelling out up  to $5000. Those were some costly hash browns.

But the biggest costs come upgrade  time are when things get digital.

Remember walking into your local McDonald’s  and thinking it suddenly looked futuristic?  

The old paper menu boards were replaced with  fancy digital menus that changed automatically,  

and would even switch over the second  it turned from breakfast to lunch. Well,  

those didn’t come cheap - and usually came as  part of a larger interior makeover to make the  

restaurant look more modern. That fancy new  menu came with a massive price tag of over  

half a million dollars - a major investment for  even the most successful McDonald’s franchise.

And then there’s those  notorious ice cream machines.

You know how you can never seem to get McDonald’s  ice cream when you walk in? The machine’s always  

broken! The machines require a nightly cleaning  cycle, and if they break down, they can only be  

repaired by a technician sent by corporate - so  the costs of these machines can add up quickly.

And recent events have made some  of these upgrades more urgent.

With the pandemic of 2020 making many people  minimize physical contact and prefer contactless  

payment methods, many McDonald’s introduced the  Create Your Taste kiosks. These digital tools  

not only let people order and customize their  food independently, they meant you could get  

your food without ever having to interact with  a worker until your bag came out. The kiosks  

got rave reviews except for those who had to  have their grandkids order for them, but these  

high-tech devices didn’t come with a light price  tag - costing a whopping $130,000 per franchise.

Which raises the question - is this  still a sustainable business model?

The costs can add up quickly for franchises,  and while restaurants are technically not  

required to make upgrades when the company  offers them, that’s a double-edged sword.  

Older restaurants usually find upgrades are  more expensive, but their restaurants are  

also the most likely to be deemed no longer up  to par by the parent company. And if McDonald’s  

feels the store isn’t representing them well,  they can decline to renew their franchise and  

essentially force them out of business -  often handing it over to a new franchisee.

But for many, the hefty price of  getting in the door is worth it.

McDonald’s has a reputation for  being an expensive franchise to open,  

but studies indicate it’s not out of line  with some of the other top fast food joints.  

Taco Bell and KFC all have similar high rates  and require similar specialty equipment.  

The outlier? Subway, but the famous sandwich shop  often works out of smaller spaces and doesn’t  

offer as big a variety of food as McDonald’s.  No deep-fryer needed to make subs - yet.

And despite the high price tag, it’s  not impossible to make a profit.

So how much of McDonald’s franchisees’ gross  profits winds up going right back to the company?  

The average franchisee pays between 8.5 and  12 percent in rent and other fees every month,  

but that doesn’t account for upgrades - which  are unpredictable and can show up at any time.  

But most McDonald’s around the country are  franchises, and the company shows no sign  

of slowing down. That means that if you have  the resources and open a franchise, some savvy  

business sense is likely to leave you with a lot  of pocket money for all the McNuggets you want.

For more on the secrets of the fast food world,  

check out “This Fast Food Item Has Over 1,500  Calories! Worst Fast Food Items You Can Order”,  

or watch “What Will We Eat in  the Future” or a look ahead.