The hidden costs of running a McDonald's restaurant

WikiMedia Commons

Owning a McDonald's franchise can be a lucrative business.

It has been estimated that McDonald's franchisees' gross profits average about $1.8 million per restaurant in the US.

But on top of paying franchise, advertising, and real-estate fees, operators are on the hook for a lot of other costs that they can't necessarily plan for — such as upgrading kitchen equipment and remodeling restaurants.

Bloomberg's Leslie Patton compiled a list of many of these costs that have recently hit franchisees as McDonald's tweaks its menu with the addition of all-day breakfast, customizable burgers, and more.

They include: Create Your Taste kiosks ($125,000); McCafe espresso machines ($13,000); muffin equipment ($4,500); all-day breakfast equipment ($500 to $5,000); interior makeovers including upgrades to digital menu boards ($600,000); and complete restaurant remodels ($1 million to $2 million).

That's nearly $1 million in upgrades, excluding an entire restaurant remodel.

For many franchisees, the older their restaurants, the more expensive their upgrades will be. If they refuse to make the investments, the company can push them out of business by declining their franchisee renewal.

WikiMedia CommonsPotential for these costly upgrades is likely why the company requires that new franchisees have liquid assets of at least $750,000 to open a single restaurant.

Startup costs, which include construction and equipment expenses, average between $958,000 and $2.2 million, according to McDonald's. The total is determined by the geography and size of the restaurant, as well as by the selection of kitchen equipment, signage, style of decor, and landscaping, the company says.

Franchisees must pay 40% of the startup costs with cash and other nonborrowed resources, while the rest can be financed.

In addition to those costs, McDonald's charges a $45,000 franchisee fee and an ongoing monthly service fee equal to 4% of gross sales. Franchisees must also pay rent to the company, which charges a percentage of monthly sales.

Franchisees have historically paid about 8.5% of sales in rent costs, though some pay as much as 12%, according to a 2013 Bloomberg report.

McDonald's franchisee startup costs are similar to those of KFC, Wendy's, and Taco Bell.

Subway, by comparison, is far less expensive, costing between $116,000 and $262,850, according to the company. Subway also requires minimum liquid assets of only $30,000 to $90,000.

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