Business 101: How a Franchise Works

A few months ago I read an article that bothered me, and it's been nagging at me ever since.  I don't even remember what the article was about, but I think it had to do with Apple stock paying a dividend.  The part that bothered me though, was the author's remark that successful companies like Apple and McDonald's should use their excess cash to pay their employees better rather than pay a dividend to their shareholders.  As far as Apple goes, I don't know enough about the situation to have an opinion on that.  However, I think this author was implying that the high school kid who asks you if you want fries with your Big Mac is an employee of McDonald's.  That is not necessarily true.  McDonald's is a franchise.  McDonald's and other franchises may have some corporate-owned stores, but they also have stores owned by private corporations, partnerships, or maybe your next-door neighbor.

Here's my overly-simplistic explanation of how a franchise works.  (For the sake of full disclosure, yes, my family is a franchisee, not of McDonald's but of another restaurant chain.  I am in no way intending to put down any franchise.  It can be a great business opportunity for those willing to work within the parameters of a franchise agreement.)  Basically, a franchisee buys the rights to run a business under the name of the franchisor (such as McDonald's).  The franchisee uses the approved business operations, locations, food vendors, decor, logos, etc., sells a product that is virtually identical to every other franchisee in the organization, and gets the advantages of shared advertising and name recognition.  The franchisor makes their money from sales at corporate-owned stores, but also from fees collected from the franchisees.  My quick Google search results told me that McDonald's charges a $45,000 one-time franchise fee plus 4% of gross sales.  I'm assuming from my franchise experience that the franchisees also pay separately for their share of regional or national advertising.  In our case (not McDonald's) this comes to about another 5% of sales.  Some McDonald's locations make a lot of money and some probably struggle to pay their bills every month, but McDonald's Corporation makes their money either way, although they certainly make less on the low-volume stores.

I've been guilty in the past of avoiding chain restaurants because I want to support local business people.  But the truth is, many chain restaurants are franchises, owned by people who are every bit as "local" as the owners of the mom-and-pop restaurant next door.  So if and when you ever get a dividend from your shares of McDonald's stock, don't feel like you're stealing from the kid behind the counter.  He probably doesn't actually work for McDonald's.