McDonald’s this year revealed tougher new standards for franchisees to renew their restaurants, a massive change that has ignited a firestorm among operators and could lead its largest independent franchise association to take a vote of no confidence in management.
On Tuesday, however, McDonald’s CEO Chris Kempczinski said this is the best time to put new standards in place, given high demand among franchisees for the chain’s restaurants, and that such standards are important to keep the company on top.
He also suggested that any “concerns” about the standards would come from those owners who are “maybe not one of our stronger performing franchisees.”
“Everything we’ve announced, if you are a strong performing franchisee, you’re going to be excited about this because what it means is that you’re going to continue to have the opportunity to grow and you’re going to have stability around your equity,” he told investors. “I think where there is concern is if you are maybe not one of our stronger performing franchisees. Some of the announcements that the team made probably does raise your concern.”
McDonald’s revealed the tougher standards in June, which will make it harder for franchisees to get approval when their franchise agreement comes up for renewal while also toughening standards for children and spouses of operators to get locations.
McDonald’s has argued that the standards are needed to ensure that only the best operators remain as it prepared to bring new franchisees in through its previously announced, $250 million initiative to bring a diverse set of new operators into the system.
Franchisee reaction was swift. The National Black McDonald’s Operators Association approved a “vote of no confidence” in company management. The vast majority of franchisees in a National Owners Association—the larger independent operators association—wanted that group to take a similar vote in a survey earlier this month. One franchisee privately called it an “absolute declaration of war on owners.”
The vast majority of franchisees in that survey, completed by more than 600 operators, opposed the provisions in the standards changes.
In his comments, Kempczinski explained the need for the standards, and said that the best time to take a step like this is when things are going well. McDonald’s sales have been on a strong run in recent years, interrupted only by the worst of the pandemic, and profits for franchisees are high despite high labor and food costs.
While 13% of the chain’s franchise locations were sold last year—a record for the chain—demand to buy those locations remains even stronger. Valuations for the company’s restaurants are “between 8 and 10” times EBITDA, or earnings before interest, taxes, depreciation and amortization, Kempczinski said.
One of the most notable buyers of the chain’s restaurants has been McDonald’s itself, which has used its “right of first refusal” more aggressively than it has in years, if not ever. The company also recently acquired one of its most prominent franchisees, the 60-unit Caspers Company, headed by Blake Casper, who helped found the National Owners Association.
“I would say they’re taking advantage of the strong health of the business to get multiples of 8 to 10x when they’re selling, which is the best that we’ve seen in anybody’s recent memory,” Kempczinski said. “So there are some people taking money off the table right now, but they’re doing it at incredibly strong multiples.”
That position is a strong one to be in for a franchise, he said. “Everything we announced is about, for us, continuing to make sure that we are going to be the best place for the best franchisees,” he said. “You only get to make those announcements in my view when you’re doing it from a position of strength.
“And that’s what we’ve got in the U.S. right now, earned over the last several years through our performance.”
Kempczinski said that all the announcements the company has made have been aimed at ensuring it has “the best franchisees in our industry.”
“Our aspiration at McDonald’s—frankly, one of the things we pride ourselves on—we absolutely believe that we’re the best franchisor in our industry,” Kempczinski said. “And we think we’ve demonstrated that over the last 70-plus years. You only get to say that if you continue to have the best franchisees. And the moves that the team announced in the U.S. are designed to ensure we continue to have the best franchisees in our industry, which then makes us the best franchisor.”
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