Many McDonald’s franchisees left the system last year

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 have been sold, involving around 400 franchisees, sources told Restaurant Business. After more than 700 stores were transferred each of the previous two years, according to documents. In addition to more than 400 closings during this period, approximately 28% of franchise-owned units either closed or sold in just two years.

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

McDonald’s, for its part, argues that “pent-up demand” for exits after several years of refurbishing the brand’s restaurants, as well as the pandemic, led to a number of deals last year. The operating environment has been tough, and given the high valuations, coupled with strong cash flow, many operators just take the cash and walk away.

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But franchisees also attribute the departure to cultural issues, saying the massive changes made by 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 far fewer franchise support staff, many of whom are younger and less experienced. They also said there were more guidelines from the company.

“We were no longer partners,” said an operator. “We have become pseudo-employees.”

They cite a series of disputes between the company and those responsible for operating 95% of the chain’s 13,400 U.S. restaurants, including disputes over renovations centered on the brand’s kiosks, a major dispute over technology fees in 2020 and, more recently, a new series of surprise inspections.

Franchisees argue that new inspections set to begin next year would exacerbate 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 claim that the company prevented the expansion of key franchisees by buying up restaurants put up for sale so it could sell the stores to other operators. The process, known as the “right of first refusal”, is common in franchising and gives the franchisor the right to step in and buy a store from a franchisee after reaching an agreement to sell it to a other operator. Franchisees say the company used that right more than ever last year.

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

“I’ve had a dozen or two friends say ‘I’m sick of it,'” one operator said. “They’re just frustrated.”

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