Do Angry McDonald's Franchisees Have a Leg to Stand On?

If you're thinking of becoming the owner of any franchise someday, there's an important lesson contained in what's currently going on with this fast-food giant.

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By Joel Libava

Opinions expressed by Entrepreneur contributors are their own.

I'm rather obsessive when it comes to following the latest news in the world of franchising. One of the stories that I've been focused on lately is the McDonald's one. If you're thinking of becoming the owner of any franchise someday, there's an important lesson contained in what's currently going on with this fast-food giant.

You do know what's going on with McDonald's franchisees, right?

McDonald's Franchisees Are McFuming
Franchisees of the second-largest fast-food chain in the world say McDonald's corporate is focused way too much on pleasing Wall Street and it's causing their profits to suffer. The franchisees feel the company is charging them way too much to operate their restaurants, citing rising costs for rent, remodeling, training and software.

Now, before you start feeling sorry for McDonald's franchisees, there's something that I need to point out. It revolves around money. Lots of money.

Super-Sized Capital Requirements
Not just anyone can become an owner of a McDonald's restaurant. There are certain "qualifications."

I'm going to focus on one of them as it relates to this article: You need to be a millionaire.

That fact alone disqualifies most of today's prospective franchise owners. In other words, you need to have access to capital; lots of capital. You'll need it before and after you open your franchise.

If you want to buy a brand new McDonald's franchise for sale, you'll need to come up with 40% of the total cost-upfront. But your money can't come from just anywhere. For example, you can't tap into your home equity line of credit or use any other form of borrowed resources to pay for your franchise business. Startup funds need to come from your cash on hand, stocks or bonds – things of that nature. Basically, you'll need around $750,000 of non-borrowed resources to even be considered by the McDonald's franchise development department.

Related: What the Crowdfunding Boom Means for Franchising

In addition to the super-sized upfront investment, McDonald's franchisees pay what are called "ongoing fees" on rent, remodeling and other expenses associated with maintaining their business. Those fees can quickly add up, especially when it comes to rent. That's because rent is based on sales. In the past, McDonald's franchisees have paid around 8.5% of their store sales in rent.

If a single McDonald's franchise does $2 million a year in sales that would mean that the franchisee would be paying corporate $170,000, or $14,166 a month, in rent based on the 8.5 % rate. Then McDonald's adds on a "service fee." That's another 4% of sales – or $80,000 a year – that the franchisee pays out. So, approximately $250,000 is paid out (to corporate) annually by one franchisee doing $2 million a year in sales.

What's the Beef?
Some franchisees are paying more than 8.5% of annual store sales in rent, according to some of the reporting that I've seen. Not only are higher rents hurting their bottom lines, they're also forcing some franchisees to hold up on expensive remodeling programs.

Adding insult to injury is something that every small business owner in America is trying the wrap their arms around: the Affordable Care Act. Small-business owners, including McDonald's franchisees, are scrambling to find ways to pay for the new mandates put forth by the Obama administration. Most likely, franchisees are going to have to pay out more for their employees' health care costs.

Related: The Fastest-Growing Global Food Franchises

On a positive note, the Obama Administration announced that it will delay collecting fines on the employer mandate for businesses with 50 or more full-time or full-time equivalent employees until 2015. Small-business owners now have a bit more time to figure out the best way to implement Obamacare.

There's an Important Lesson Here
Franchisees are not in control of the big stuff.

While it's true that owning a franchise offers a lot of freedom, especially when compared to working for someone else, there is a rule book – and it's written by the franchisor.

Notice that I didn't write that the rule book is written by the "evil" franchisor. The rules that are put in place aren't meant to upset you. The rules, which are laid out in the 300 page operations manual, and in the 20+ page franchise agreement, are what make the business a franchise business. They're meant to keep everything consistent throughout the franchise system. They help strengthen the brand. And, they're meant to help your business succeed.

McDonald's franchisees are letting it be known that they're not happy with some of the rules. Maybe they'll be able to get some concessions. Stay tuned.

If you become the owner of a franchise, get ready to follow the rules. Get ready to not like some of them. Get ready for the ups and downs. Get ready to be an owner.

Just remember that you're not in total control.

Related: How Kat Cole Went From Hooters Girl to President of Cinnabon by Age 32

Joel Libava

Joel Libava is a franchise ownership adviser best known as The Franchise King®. He is the author of Become A Franchise Owner! The Start-Up Guide To Lowering Risk, Making Money, And Owning What You Do (Wiley 2011).

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