McDonald’s Announces New Changes; Big Increase in Refranchising Rates

McDonald’s has been evolving, mostly due to the leadership of CEO and President Steve Easterbrook.  The company is adapting to changing tastes in the market: more millenials who prefer snack-type food to burgers, an increase in demand for healthy food options, and new competitors in the marketplace, such as Chipotle and In-N-Out Burger.  Easterbrook has said “The corner of our System is our powerful and enduring brand…My priorities for McDonald’s as a modern, progressive burger company are three-fold: driving operational growth, creating brand excitement and enhancing financial value.”  These factors led McDonald’s to announce their turnaround plan in 2015, of which all-day breakfast is the most visible (and popular) manifestation.  An important, but often overlooked part of their strategy is refranchising.  The company has raised their global refranchising target to 4,000 restaurants through 2018, with a new long-term goal to become 95% franchised.

But what is refranchising?  Refranchising is the sale of corporate units (restaurants in this context) to franchisees.  There are lots of reasons why companies choose to refranchise.  Often, a franchising business is more profitable and has lower capital requirements, while remaining insulated from volatility in operational costs and sales.  A component of the increase in profits is that franchisees are better business operators, often outperforming the franchisors they took over from.  Franchisees are ideally situated to succeed, as their only focus is promoting the profitability of their particular location, and they don’t have to worry about the success or operation of the brand as a whole.  Franchisees are often entrepreneurial in attitude, and find more success in business growth and development than managers.

This has big implications for you.  Refranchising can be a very profitable business opportunity for the motivated entrepreneur—especially noting the big trends towards refranchising in the marketplace.  Keep your eye out for juicy deals popping up on the horizon as investors put pressure on chains to demonstrate profitability and pay down debt, causing them to increase refranchising efforts.  If you decide to take on the task of purchasing and running a franchise, remember to keep a few tips in mind. 

Take care to not overpay for a store.  Often franchisors refranchise struggling locations to move them off the balance sheet and make them somebody else’s problem.  Generally, the normal market rate is 4-5.5x EBITDA; ask for financial statements to corroborate a valuation.  Detailed and accurate financial information is very important, make sure you can acquire and evaluate it.

Consider more creative ownership structures apart from asset sales with limited representations and warranties.  For example, some franchisees may want the franchisors to distribute assets as regional entities and do a stock or membership sale.  This can often be more efficient and profitable for the franchisor and franchisee.  There are a lot of possibilities today to find a transaction that matches your business interest, risk, and tax requirements.

Note that different franchisors offer different incentives for franchisees.  Some popular ones are royalty relief, advertising funding assistance, deferring franchise fees during new developments, and offering free training services. These can often be make-or-break perks, so be sure you’re aware of the possibilities.  During the negotiation process you’ll be able to maximize your return from the franchisor.

The most important factor is to confirm your franchisor has a well-developed strategic plan for the future that includes refranchising.  The franchisor-franchisee relation is a symbiotic one—ask important questions like how they’ll be handling corporate stores and how changes affect earnings, use of capital, and their relationship with other franchises.  You can be sure of success with an organization with an informed strategic direction.

McDonald’s has already seen some impressive results from their turnaround, recently announcing a 5% increase in global sales for the fourth quarter in 2015 and an increase of 16% in diluted earnings per share.  Now is a great time to explore franchising opportunities at McDonald’s and other companies. To learn more about entrepreneurship through franchising, attend our free monthly webinar, Franchise Ownership as a More Stable Career Path. The webinar is free, but you need to pre-register, which you can do online by clicking on the linked seminar title.

You may also register by calling 866-246-2884.