NEW VENTURE DEVELOPMENT
Introduction
The major economic value of franchising is that it creates self employment and provides more
employment opportunities in an economy. Franchising provides an efficient system of
distributing goods and services to different levels in the economy. Franchisors provide and
facilitate professional business advices to their own franchisees who in return assist in service
delivery and consumer identification.
Franchising as a business organization form contributes to business operations and expansion in
many countries. The success of franchised business operations has been largely attributed to the
strict criteria franchisors use to evaluate, select and recruit franchisees. The other reasons that
may contribute to these successes are the franchisor support systems, levels of financial bases
and the general relationship between the franchisor and the franchisee. (Frazer & Winzar, 2005)
The qualitative assessments include personal integrity of the potential franchisee, his
management and communication skills have to be above average. Financial management,
personality and leadership skills must be positively evident to enable a potential franchisee to be
recruited. Some franchises like McDonalds insists on hands on management, that’s the
franchisee must be able to participate on critical business operations and decision making
processes.
2 NEW VENTURE DEVELOPMENT ASSIGNMENT
Quantitative assessment includes the assessments of the franchisee’s financial capabilities and
the ability to achieve the requisite operations standards of the franchisor. The franchisee must be
a successful business person and a person who has literally demonstrated some business
capabilities and has financial acumen. McDonald’s franchisees recruitment is often rigorous and
the selection is very competitive.
The franchisee on the other hand before deciding to invest on a particular franchise must ask
several questions on the profitability of the franchise and whether to invest on a new franchise or
buy an existing franchise and also find out the reasons why the franchise is being sold out. The
terms of the franchisor also matters to the franchisees decision whether to accept or reject the
terms.
McDonalds
McDonalds is one of the world’s largest fast food restaurants globally. The hamburger is the
basic symbol of McDonald fast food restaurant that serves over sixty eight million customers
every day and has presence in over 119 countries globally. McDonald management system is
based on the franchise system where most of its sales are in the form of royalties and other fees
paid by the franchisees. In the year 2012, McDonalds earned a total profit of $5.5 billion dollars
from a total turnover of $27.5 billion dollars. The primary sales of McDonald’s products come
from hamburgers, chicken, soft drinks, French fries, cheeseburgers, desserts and milkshakes.
And lately salads fish and fruits. McDonalds operates about 15% of the total McDonald’s
operations which are wholly owned by McDonalds worldwide. The rest are operated as
franchises. (McDonald’s publication, 2012)
In the UK and parts of Ireland, Only a hand full of the restaurants operates as franchises,
majority are wholly owned by McDonalds. In the UK, a typical restaurant that may house a
McDonald’s facility ranges between £125,000 and £325,000. McDonalds requires an upfront
payment of 25% as the value of the unencumbered funds. The rest can be provided through
financial assistance as bank loans. McDonalds also charges £30,000 as a franchise fee payable
once and a further £5,000 as training fees which is refundable after successful training. The other
charges payable by the McDonalds franchisees are mostly the monthly rent based on the business
3 NEW VENTURE DEVELOPMENT ASSIGNMENT
profitability which is about 10-15%, use of McDonald’s brand 5% of sales and McDonald’s
marketing 4.5%. The average turnovers on most McDonald’s outlets range from £ 95,000 to £
200,000 annually in the UK. ( MCDONALDS CORP 2013 Annual Report Form 10-K , 2014)
Franchising businesses as spelt out on management books are a little different as the terms of
most franchisors are mostly business oriented and they literally take most of the profits from the
franchise business operations like in the case of McDonald’s. Their fees account for about 20%
of the total sales turnover which is practically most of the net profits from the business
operations. The franchisee must carefully analyze the business structure and terms of the
franchisor before accepting or rejecting the franchisors offers.
References
Frazer, L. & Winzar, H. (2005) Exits and Expectations: why disappointed franchisees leave.
Journal of Business Research 58 (11), pg.1534 – 1542.
MCDONALDS CORP 2013 Annual Report Form 10-K (2014) United States Securities and
Exchange Commission. February 24, 2014.
McDonald’s publication (2012) Corporate FAQ , McDonald’s Corporation. Retrieved 2012-11-27.
