Commercial Real Estate News / General CRE / Fast Food Franchise: Tips for Buying, Leasing, Operating, & Managing the Business

Fast Food Franchise: Tips for Buying, Leasing, Operating, & Managing the Business

Published: 08-07-23 Category: General CRE

Luke Williams

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Fast food is a big business, collectively worth over $972 billion. If you've ever wanted to get in on the action, fast-food franchising is a good place to start.

Franchise owners can invest in established food brands to create successful businesses. Here, we'll discuss fast-food franchising and what you can expect when buying a fast-food franchise.

What Is a Fast-Food Franchise?

A fast-food franchise is a type of fast-food business model where the owner licenses their operational model and branding to another owner who manages the restaurant. The franchisee independently operates the restaurant and splits the revenue and profits with the franchisor.

The main benefit of fast-food franchising is that it lets you leverage the branding and name recognition of an already-existing restaurant. When you buy a franchise, you are not just buying the physical property—you also get access to the business's marketing, management support, vendors, customer reputation, etc.

How Does Franchising Work?

Fast Food Franchise: Tips for Buying, Leasing, Operating, & Managing the Business

The basic franchise model is relatively simple: The franchisee provides upfront capital investment, and the franchisor licenses the brand's logo, marketing materials, operational structure, and corporate support. The franchisee then pays a set percentage of royalties to the franchisor.

Here's how this works in practice: Say you want to buy a McDonald's franchise. You would pay Mcdonald's an upfront franchising fee, and they would lease you a location and provide training. McDonald's will provide business support, and you pay them a percentage of total sales—usually between 4% and 12%. Some franchisors may charge a base rent plus a percentage of sales.

While you are technically the owner of that specific McDonald's franchise, you have to run the restaurant according to McDonald's franchise rules—including quality standards, menus, inventory management procedures, signage, and customer service. The trade-off for getting their brand and infrastructure is you have to run things their way.

The History of Fast-Food Franchising

Franchising has existed in some form or another in the US since at least the 1800s, but fast-food franchising really came into its own in the 1950s with industry mainstays McDonald's, KFC, and Burger King, to name a few.

In 1979, the FTC created the Uniform Franchise Offering Circulars, which set standards and rules for franchise opportunity disclosure. This law established franchising as a federally recognized business practice.

Since then, franchising opportunities have grown. In 2022, there were an estimated 192,000 fast-food franchise establishments in the US, and fast-food franchising has been experiencing significant growth since the pandemic. Franchising opportunities have expanded from classic fast food to more niche options, like:

Juice bars;
Ice cream shops;
Health foods;
Taco trucks; and
Coffee shops.

Fast-food franchises generate an estimated $200 billion in annual revenue in the US alone and over $570 billion worldwide.

Is Owning a Fast-Food Franchise Profitable?

Yes, fast-food franchises can be moderately to highly profitable. According to a report from the National Association of Restaurants (NAR), the typical restaurant has a profit margin of about 5%, meaning the restaurant profits five cents for every dollar in sales.

Fast-food restaurants typically have higher profit margins than full-service restaurants due to lower food and labor costs.

However, profit margins can vary significantly depending on the specific franchise's business model, location, and overhead. For example, some McDonald's franchise locations have profit margins higher than 20%. Exact profit margins will depend on your ability to manage costs and run the store.

How Much Do Fast-Food Franchise Owners Earn?

Again, this question depends on your ability to run the store and manage costs. Fast-food franchises can turn a high gross profit because food costs are cheap, but what matters for franchise owners is net income—i.e., how much money is left after paying for overhead (e.g., labor, utilities, royalties, etc.).

Perhaps unsurprisingly, restaurant franchisors and franchisees are hesitant to disclose exact incomes. According to research from Franchise Business Review, the average annual income from food franchise owners is about $120,000. About 40% make less than $50,000, while the top 15% of operators make more than $200,000 a year.

However, franchises can have high initial investments and strict financial eligibility requirements. For example, the McDonald's franchise fee is $45,000 and franchisees must have at least $500,000 in personal, non-borrowed assets.

Is It Hard to Own a Fast-Food Franchise?

Yes, fast-food franchising can be difficult, but rewarding. Fast-food franchising agreements can have complex clauses and strict performance requirements that can be difficult to meet. Lease terms on locations can be long, and you have relatively little flexibility to change operations.

As the owner, you will be solely responsible for meeting revenue goals and managing the store. You will also be responsible for the commercial property that you lease or buy. We recommend that franchisees work with a commercial real estate broker when renting space for their franchise.

However, being a franchisee has its positives. You get to be the boss and leverage an already successful brand to make money. Franchisors also give their franchisees a significant amount of support through training and assessments.

Which Fast-Food Franchise Makes the Most Money?

According to QSR Magazines 2017 QSR50 report, the 10 highest-earning fast-food franchises by total sales are as follows.

McDonald's: $37.4 billion;
Starbucks: $13.1 billion;
Subway: $10.8 billion;
Burger King: $10 billion;
Taco Bell: $9.7 billion;
Wendy's: $9.2 billion;
Dunkin' Donuts: $9.1 billion;
Chick-fil-A: $9 billion;
Domino's: $5.9 billion; and
Pizza Hut: $5.5 billion.

As you can see, McDonald's is by far the king (sorry, Burger King) in terms of total sales and revenue. The top 10 highest-earning franchises in terms of average annual sales per location are:

Chick-fil-A: $4.09 million;
Whataburger: $2.77 million;
Panera Bread: $2.63 million;
McDonald's: $2.67 million;
Jason's Deli: $2.56 million;
Zaxby's: $2.35 million;
Culver's: $2.3 million;
In-N-Out Burger: $1.97 million;
Chipotle: $1.94 million; and,
El Pollo Loco: $1.85 million.

On this metric, Chick-fil-A is one of the best franchises to own, even better than a McDonald's franchise. Franchising fees for Chick-fil-A are only $10,000 and there are no net worth requirements. However, Chick-fil-A has a 15% franchise fee—significantly higher than competitors.

How Much Real Estate Does McDonald's Own?

McDonald's currently has about 36,000 franchise locations worldwide and outright owns about 70% of those buildings, for a total real estate value of over $28 billion.

McDonald's actually owns nearly twice as much real estate as its competitors, making it one of the largest real estate companies in the world.