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Financing

McDonald’s will invest $250M to diversify its franchisee base

The company is undertaking the first global effort to recruit new operators into the system as it looks to increase demographic representation among owner-operators.
McDonald's franchisee diversity
Photo by Jonathan Maze

McDonald’s said Wednesday that it plans to invest $250 million over the next five years to help new franchisees in the U.S. finance restaurants as part of a global effort to increase the diversity of the company’s base of owner-operators.

It is the first global recruitment effort to get new franchisees into the system in company history. It is the latest in a broad set of efforts to improve the Chicago-based company’s record on diversity at a time when it is under fire for allegedly discriminating against Black workers, franchisees and vendors.

“McDonald’s was founded on a strong core belief: Our franchisees should reflect the diverse and vibrant communities we serve,” CEO Chris Kempczinski said in a system message viewed by Restaurant Business. “We have an opportunity to take this farther and accelerate representation across the global franchisee base with programs that enable new prospective franchisees the opportunity to join the Arches. And we must begin now.”

The company said it plans to reduce the upfront equity requirements for qualified new franchisees. The $250 million will be used to provide prospective new franchisees with alternative means of financing to reduce the barrier to entry for qualified candidates. The company said that this could help diversify its franchisee base.

Currently, 29.6% of its U.S. franchisees identify as Asian, Black or Hispanic. Women make up 28.9% of its U.S. operators.

But McDonald’s is not growing in the U.S.—its store count has shrunk in recent years, to about 13,800. New franchisees would be brought in to acquire stores put up for sale as they come available.

It is not cheap to buy a McDonald’s restaurant. The typical location is generating record cash flow and some stores are going for a valuation multiple of 10 times EBITDA, or earnings before interest, taxes, depreciation and amortization. That’s historically high for a franchisee of any kind.

Buying any franchise requires financing and that can be a major challenge for new prospective operators. “Access to capital continues to be a challenge in closing the wealth gap in the U.S., particularly for minority entrepreneurs,” Nicole Elam, CEO of the National Bankers Association, said in a statement. The association is working with minority-owned and operated banks to get capital to franchisee candidates.

McDonald’s said it plans to expand its franchisee recruiting and training efforts for all backgrounds, including for historically underrepresented groups. The company said that it will build on its “heritage and industry leadership in restaurant management training to support newly recruited franchisees and the broader system.”

The company said that it plans to support these new franchises with resources from different functions and mentoring from experienced owners, among other programs. “Ours is a complex, demanding business,” Kempczinski said in his message. “It takes continued focus and support to succeed. This will help new franchisees get off to a strong start and give all franchisees an equal opportunity to grow.”

Black franchisees, including existing and former franchisees, have sued the system multiple times in federal court claiming that the company has treated them differently from White operators, arguing that the company provides them with less support and steers them to less favorable stores.

They argue that this has left Black franchisees with less cash flow and pushed more out of the system. The number of Black franchisees in the system has been cut in half since 1998—though the number of total franchisees in the system has fallen over that time, too.

McDonald’s for its part has denied it discriminates against Black franchisees. The company has also undertaken a massive effort to improve its track record on diversity this year. It is tying executive bonuses to representation targets. It is increasing its marketing spending with diverse-owned media and suppliers and said it has made progress on providing equal pay for equal work by gender and race at company-owned restaurants.

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