McDonald’s franchisees who were able to sell their restaurants in 2021 received a windfall. Operator cash flow hit a record level that year, a surprise so quickly after the pandemic. Sales recovered more strongly than anyone expected. And buyers were paying up.
Some restaurants were fetching valuation multiples of 10 times EBITDA, or earnings before interest, taxes, depreciation and amortization.
That’s no longer the case. “Our restaurant valuations are plummeting,” David Bear, chairman of the National Owners Association (NOA) told a meeting of the group recently, according to a video seen by Restaurant Business. The NOA is an independent association of McDonald’s franchisees.
A number of operators have confirmed this. “Two to three years ago, a good store could command eight to 10 times cash flow,” one said. “Today that valuation is four to six times cash flow.”
A variety of factors are playing a role in the decline in valuation at McDonald’s restaurants, many of them out of the company’s hands, others unique to the chain.
First is simple: Valuations in 2021 were extraordinary and perhaps unsustainable. McDonald’s 10x valuations were unusual, an all-time high for the chain and remarkably high for a franchisee.
Rising inflation has caused problems for such stores since then, ruining the projections buyers had when they paid such prices at the time. Indeed, one operator said valuations have simply returned to where they were before the pandemic and acknowledged that 2021 valuations were too high and likely unsustainable.
Declining cash flow has also limited the amount people are willing to pay for a McDonald’s restaurant. That’s another universal issue: As restaurant profits plunged last year, valuations did, too. Rising interest rates also discourages transactions because a higher cost of debt limits the amount a buyer can pay.
As such, much of what is going on in the McDonald’s system reflects the broader merger and acquisition market. Higher interest rates and reduced profitability discouraged deals by limiting what buyers were willing to pay. They reset the market. And sellers were none too eager to sell for such prices. That slowed the market in 2022 and into this year, though there has been more activity in recent months.
And this may be where McDonald’s and the broader market differ. Bear said there were 200 McDonald’s restaurants for sale now. There simply aren’t enough buyers.
The burger giant is intent on growing again and bringing in new franchisees. But it’s been a long time since the system has had a lot of new operators. The company no longer operates many of its own locations, having refranchised all but 5% of them. Corporate operations people once were a source of franchisees.
In late 2021, McDonald’s announced that it would invest $250 million to recruit new franchisees into the system, a move designed to diversify its franchisee base. Much of that is designed to provide alternative financing to help these new operators come into the system.
Earlier this year, the company lured Tabassum Zalotrawala from Chipotle to head its U.S. development, essentially tasking her with the job of increasing the number of U.S. restaurants.
An influx of new franchisees into the McDonald’s system would certainly do something for valuations. But operators say that hasn’t happened, that there simply aren’t enough buyers right now. And McDonald’s, which wants to bring in new franchisees, is blocking some deals, franchisees say. It has also used its right of first refusal more often in recent years than it has historically—a right of first refusal enables a franchisor to step in and acquire a restaurant that is up for sale at the negotiated price.
Some have also suggested tension in the system over the past two years has hurt the market. McDonald’s and its franchisees have been in a dispute for the past year-plus over a series of new store inspections. NOA has taken the rare step of advocating for changes in franchise regulations at the federal level, through the U.S. Federal Trade Commission comment process.
Still, valuations have come down for just about everybody since 2021, McDonald’s is hardly alone in that. But the issue highlights the challenges the chain is facing as it works to bring more franchisees into the system and get growing again: Doing so isn’t as easy as it seems.
UPDATE: This story has been updated to clarify that David Bear's comments were seen in a video taken of his speech.