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Comment by dudus | Hacker News Reader

As a counter argument McDonald's does the same thing and is quite successful at it. When you open a franchise you have to build on the main corp land and pay for rent on it in perpetuity, on top of franchise fees .

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McDonalds is also careful to ensure all their franchises are in locations that will make the owner a ton of money (if they run the business well) and so it is a good deal. Not all companies work this way though.

Surely any successful company, and even most any failing company, has a system for identifying and quantifying optimal locations for new builds. It’s not like Amazon is just taking whatever real estate it can get. There are at least some parameters.

in my city we had the first closed store of McDonald's in the world! great achievement

Yes it is very rare. In most cases it is probably due to general economic decline of the area, but every once in a while they were just wrong about the potential of the location.

What town, and when was this? I remember noting that two closed in seattle in the early 2000’s and thinking that was pretty unusual.

It was in the early 90s

Win-win - corporate ends up with prime RE and reliable rents; franchisor ends up with business pumping cash

I wouldn't say a ton of money. This article [1] says it averages 150k/yr profit but it costs between 1-2mil to start.

[1] https://www.mashed.com/178309/how-much-mcdonalds-franchise-o...

That's pretty good.

That's what, ten percent in profits? Sounds pretty good to me!

"franchise owner" usually means managing the restaurant, not passive income.

Like all investors / business owners income is the resukt of actively managing something. In the case of McD franchise owners, there are at least people working for you to whom tasks can be delegated

Usually means hiring a GM and checking the books / visiting once a month.

That's why a lot of people own 2 or 3.

I'll take a 10 cap any day of the week right now.

Take 5 million in loans, start 3 and then you have 450k - .05*5 million = 250k free cash flow. Not a bad deal at all in an inflationary environment, but a rough deal in an environment with rising rates.

They won't allow you to franchise if you need a loan to come up with the money. You need to demonstrate "unencumbered liquid assets." They might allow a certain percentage to be borrowed, but it's likely rather low.

Can someone explain why McD bothers to franchise their restaurants?

Usually franchise contracts are set up in order to transfer most risk onto the franchisee. But the risk is marginal because of due diligence McD does before launching a new venue.

Is this some sort of accounting/tax trick that enhances McD financial figures on paper? Does this allow them to raise more capital for expansion somehow?

If you don't sell a franchise, you have to pay your workers. Better for workers to pay you.

> If you don't sell a franchise, you have to pay your workers. Better for workers to pay you.

I mean, trivially, I'll pay a lot of money to work someplaces if a good percentage of that profit goes to me.

How much would you pay Google upfront to manage the adwords on websites in the .uk space if you got to keep 95% of the profits?

McD is the largest property owner, at least it was for a minute.

It’s actually how they make their money, rent.

https://www.wallstreetsurvivor.com/mcdonalds-beyond-the-burg...

So the workers can't unionize across locations because they all technically work for different companies

Some franchisees own multiple locations, so that's not at all clear.

Didn’t McDonald’s do it by buying the plot of land and using that as leverage on the franchisee? As a way of controlling them.

Recruiting, managing, and paying people to run those restaurants with the level of dedication that an invested franchise owner has would be challenging. There are a lot of great managers out there to hire, but probably at a higher rate than McDonald's (or any competitor) would want to pay.

Why aren’t there any franchising IT companies?

Like in "I sell software for franchisors/franchisees"?

or like in "I sell this IT thing through partners who behave like franchisees"?

More like ”we have this development flow and tooling that just works and everyone knows it so we have a strong brand, let’s lease it to others and avoid taxes by making them pay back appropriate interest on corporate loans to the parent company”, i.e. the McDonalds model.

Franchise stores and restaurants like McDonalds don't compete with each other as they have a physical attribute to them insuring this. IT Franchises however would be free to compete with each other making this business model pretty much impossible. The only way I see this working is with Franchises limited to one per country/state, who are specialised in regards to language, customer preferences and local laws.

I think the advantage for a restaurant is the contracts with large scale suppliers. You could do the same with hardware and software perhaps, but the advantages and disadvantages would look different.

What is there to franchise? As others pointed out software is easy to sell to anyone. Maybe you can franchise onsight support, but the big customers for onsight support mostly want a national company to take care of them, so no franchises as it is all the national number. The little companies maybe, but the little companies don't need the big brand, they learn which local company provides support.

There are, specially on Cloud business. They are called as Cloud Partners who resell AWS and Azure which they bundle it with their consulting solutions. Good examples are Accenture, Infosys ...

But they pay that - or even way higher rate - indirectly, as part of franchise deal.

Same reason banks sell mortgages instead of buying homes and renting them. It’s not their business model to operate thousands of stores. Having many different people operate many different stores to their standard is.

Probably mostly historical reasons. When McD was a small company, franchising was the best way to expand as rapidly as possible.

i see franchising as a form of specialization. The corporate head specializes in branding, sourcing of suppliers and logistics and menus, etc. The franchisee specializes in operations day to day.

These days it's probably not necessary. Starbucks doesn't franchise and this allows them to do things that make more sense for Starbucks as a whole as it would make for any single location, for instance, the notorious Starbucks across the street from another Starbucks that Lewis Black ranted about. However, it made a lot more sense in the early days of McDonalds because of the sheer organizational complexity of employing people in every medium-sized-and-up town in the United States, and now, franchise holders are an established and vested interest that the company needs to keep happy.

The margins on starbucks are a lot higher though, and the staff needs a lot lower.

Franchising is basically Uber before Uber, when someone is an "owner/operator" they will work a lot harder/do things for free that a salaried manager never would.

Starbucks also does franchise I believe (inside places like safeway and target).

Interestingly, in the US and Canada Starbucks don’t franchise, but elsewhere in the world they do. Here in the UK the majority of Starbucks are franchised.

I think it would lead to some antitrust issues to be honest. McDonalds sells you the cups, the bags, the beef, etc. They are really a business-to-business business and you the franchisee are the business that is actually consumer facing. McDonalds owning the store at that point would be like movie studios owning the theaters.

>McDonalds owning the store at that point would be like movie studios owning the theaters.

Why would that ever be an issue ?

Historically, because it hindered the ability of independent movie productions to get access to audiences: https://constitutioncenter.org/blog/the-day-the-supreme-cour...

Which is not an issue for independent beef or paper suppliers.

Largely legacy reasons related to capital access during founding, because of this McDonald's is mostly a property company that also sells burgers and burger store franchises.

State laws in some places make franchises a better worse deal. I invest in one[unnamed] company that has a few franchises, but they are regional and the state laws where they are makes running franchises not a good deal so they are no longer doing that and looking to buy bake the existing ones. They are looking to expand to new states though where the laws are different and so they may start selling franchises there.

I left McDonalds 25 years ago and I have no idea what is current. Back then about 25% of all stores were owned by the company with the other 75% franchises. The corporate owned stores were for sale if you wanted a franchise (assuming you qualify), and were in a known location so fairly low risk. The company would also buy out your franchise a good deal when you were ready to retire.

Out of curiosity, what’s the typical profit or value of a McDonalds franchise?

I'm sure there's a ton of resources, but if you want to be entertained as well, this came up in a Last Week Tonight episode about Subway, this last May. It may have been a web special.

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