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A lot of McDonald’s franchisees left the system last year

A record 1,700 restaurants changed hands last year and more than a quarter of franchisee units have either closed or been sold since 2019.
McDonald's franchisee exodus
Photo by Jonathan Maze

A record number of McDonald’s restaurants were sold last year, according to data from the company’s Franchise Disclosure Documents.

More than 1,750 locations were sold, involving about 400 franchisees, sources told Restaurant Business. After more than 700 stores were transferred each of the two previous years, according to documents. In addition to more than 400 closures over that period, about 28% of franchisee-owned units have either closed or been sold in just two years.

The departures are likely due to a combination of factors, franchisees and other sources say. The valuation for the company’s restaurants is at an all-time high, with operators able to get 10 times EBITDA, or earnings before interest, taxes, depreciation and amortization.

McDonald’s, for its part, argues that “pent-up demand” for exits after multiple years in which the brand’s restaurants were being remodeled, as well as the pandemic, led to a number of deals last year. The operating environment has been difficult, and given the high valuations, coupled with strong cash flows, many operators are simply taking the money and leaving.

This is an abridged version of the Restaurant Business story ‘Mass exodus’: McDonald’s franchisees are leaving the system that is available to subscribers. For the full story, subscribe to RB+.

But franchisees also attribute the departure to cultural issues, saying massive changes made under former CEO Steve Easterbrook, and his replacement Chris Kempczinski, have altered the relationship between the company and its owner-operators. The company operates fewer stores itself and has a lot fewer franchise support staff, many of whom are younger and less experienced. They also said there are more directives from the company.

“We were no longer partners,” one operator said. “We became pseudo-employees.”

They cite a series of disputes between the company and the people responsible for operating 95% of the chain’s 13,400 U.S. restaurants, including disputes over the brand’s kiosk-centric remodels, a major dispute over technology fees in 2020 and, most recently, an upcoming new series of surprise inspections.

Franchisees argue that the new inspections set to start next year would worsen a labor shortage by stressing managers and employees. The company, for its part, said the assessment is designed to improve profitability and operations.

In addition, franchisees argue that the company has been blocking key franchisees from expansion by buying up restaurants that are put up for sale so it can sell the stores to other operators. The process, known as a “right of first refusal,” is a common one in franchising and gives the franchisor the right to step in and buy a store from a franchisee after it reaches an agreement to sell it to another operator. Franchisees say the company has been using that right more than it ever has last year.

The disputes have had an impact on operator morale. On a sale of 1 to 5, franchisees in a survey by Kalinowski Equity Research rate their morale a 1.19, the third-lowest result in the survey’s history.

“I’ve had a dozen or two friends who’ve said, ‘I’ve had it,’” one operator said. “They’re just frustrated.”

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