Corporation stock at all time high I can bet most franchisees equity is not at an all time high. It is of course important that the franchisor is financially healthy but without successful, profitable, motivated and happy franchisees any franchise system is doomed.
More new products. breakfast 2.0. more complicated procedures. what happend to simplifying things?
McDonald's Operators build plenty of equity. Unfortunately that equity is used to reinvest in McDonald's real estate portfolio. The fact that the Operators pay for remodeling and rebuilding the real estate assets means McDonald's Corp. has more capital to send to shareholders. McDonald's Operators take on debt that essentially goes to the shareholders and Oak Brook management looks like heroes.
There are a lot of disgruntled franchisee's in the MCD system right now but the system is doing very well. As a franchisee I learned a long time ago that operator equity and operator cash flow is just not a priority for MCD Corporation. They have their own equity and cash flow to worry about. Low equity for the operator is a serious problem if you want to retire. Increasing operator equity usually requires a cash injection by the operator or reducing debt. Debt levels are very high across the system due to large reinvestments that were 100% financed. Of course, we all know that all that debt was encouraged by the company and basically went to improve company assets with inconsistent returns on that reinvestment for the operator. Servicing that debt impacted cash flow and the operator tax bill as principle payments are charged to operator draw or dividends. However, operators continued to willingly 100% finance reinvestments creating equity issues and cash flow issues except when those reinvestments generated positive cash flow. Since, as a factual matter, MCD is not our business partner the responsibility for those decisions rest with the operator. Arguments that the company made me do it by holding out the carrot of expansion does not relieve the operator of total responsibility. Thus, MCD, Banks, accountants will respond with, you did it to yourself. My opinion is that we operators are too easily lead and need to make better business decisions. Relying on MCD staff for recommendations is foolish. These are not business people. They are simply on a mission to get those reinvestments sold regardless of the merits. The positive aspect is that MCD restaurants are still a very marketable asset and there will always be operators standing by to purchase them. However, paying off the debt and the capital gain tax often doesn't leave much. Possible solutions, don't 100% finance anything. Focus on paying off debt and pre paying debt with a floating rate. Build cash.
Unfortunately, McDonald's makes the equity/cash flow/ROI business decision for you by re-writing or not re-writing.
McDonald's simplification equation: 5-2=7
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