What is the #1 best franchise — does it actually exist?

This is a hard question to answer because there are many factors and metrics that contribute to defining the best franchise.

For example, if your budget to invest into a franchise is $10,000, then your definition of a best franchise will most likely be one that has low start up costs, low operating costs, is probably a service-based franchise model and can generate cash flow pretty fast.

In this case, you have a definition of the #1 franchise, for you.

Many factors determine what is the best franchise, but if the metric is total revenue, McDonald’s is the #1 franchise because McDonald’s total revenue was $23.22 Billion in 2021 compared to Yum! Brands’ (Taco Bell, KFC, Pizza Hut) total revenue of $6.58 Billion, in 2021.  

On the other hand, if you have a budget of $1,000,000+ to invest, have your own investors, are a professional franchisee, or you have other motivations, determining the #1 best franchise may become clearer.

The #1 franchise: McDonald’s

McDonald’s was founded in 1940, started franchising in 1955 and is headquartered in Oak Brook, Illinois. Today, McDonald’s operates 40,031 restaurants in 119 countries (as of the end of 2021), including 37,295 franchised restaurants and 2,736 company-operated restaurants.

We use McDonald’s as our ultimate #1 franchise to compare all others against. We like McDonald’s not just because they are the gorilla in the franchise industry, not just because they are the king in the quick service restaurant business, and not just because they are a Dow 30 company (NYSE: MCD). 

Here’s a few more reasons we use McDonald’s and some fun facts that you may not know. 

Did you know that McDonald’s collects more revenue in rents than revenue from their franchisees? It’s true and In 2021 rent payments accounted for more collected revenue at $8.38 billion vs $4.65 billion in franchise royalties.  

Burgers are simply a great producer of revenue, so the franchise tenants can literally pay their rent.

Because McDonald’s real estate holdings are probably worth far more than $35 billion dollars, most experts would agree that McDonald’s is a real estate company with a hamburger joint. This formula has worked for McDonald’s as seamlessly as ‘fries and a shake’.

These successes are by-products of being a leader in their business and choosing to dominate their competition by choosing Operational Excellence as their customer value proposition (More about this here).

Regardless, no one can argue that McDonald’s is also probably the best, #1 franchise story ever told.

Yes, there is a difference between job franchise models, service-based models, inventory-based models, retail franchise models, owner operator models, management models, on and on. But at the end of the day…

• A franchisee is going to invest their resources into a franchise network, and 
• A customer is going to spend their money in their favorite franchised location(s).

The competition is strong.

This is why we feature McDonald’s as the mother of all benchmarking tools because their success is unquestionable and they serve as an excellent baseline, to measure other corporate franchise models against. 

Let’s get started.

What franchise makes the most money?

While it can seem confusing, there is a huge difference between the financials of a franchisor and a franchisee.  Answering the question, what franchise makes the most money is not so simple. For example:

• Some franchise models, a.k.a franchisors, make a lot of money often called total revenue. 
• Some franchise networks make a lot of total sales revenue combining all the total sales from all locations. 
• Some franchisees make a healthier gross profit (sales revenue – cost of goods sold) than others.
• And some franchisees make a healthier net profit (total revenue – total expenses) compared to others.

So what franchise makes the most money?

McDonald’s franchise makes the most money as defined as EBITDA. McDonald’s EBITDA (Earning Before Income, Taxes, Depreciation, Amortization) was $12.18 Billion in 2021 compared to Yum! Brands’ (Taco Bell, KFC, Pizza Hut) $2.38 Billion, in 2021.

That depends. If you are looking for the largest amount of sales revenue, the answer may differ from the company that makes the most net income.

Let’s dive deeper now and review some of the most frequent metrics we use when comparing franchise models, and ultimately reviewing fitness franchises. While the McDonald’s franchise is vastly different in the customer-facing concept than an Anytime Fitness franchise, in business, the idea is still the same: 

1. You acquire a new customer and 
2. You keep the customer coming back

In franchising, not much else matters.

There are five basic common ratios we often review to get a high-level picture of how well a franchise team is performing the basics. In addition to these numbers, we also assess their marketing, their customer value proposition and their use of their unique selling proposition(s).

Here’s an example of McDonald’s common ratios, taken from their 2021 Annual report, 2021 Franchise Disclosure Document (FDD), Morningstar, and Yahoo! Finance:

Each of these ratios help tell the story of how well McDonald’s is managing their assets. And since McDonald’s is arguably the best franchise in the world, we will use them to measure all others against, whether a small franchise who is just getting started, or a well-established franchise with 100+ locations.

These ratios are meant for comparison purposes, due diligence, to help you and your team set goals, become better managers, develop your plan for a breakthrough success, or simply have a great conversation.

Let’s now quickly review each of these metrics so it’s very clear what each is and why they are important. 

Current ratio — McDonald’s current ratio is very healthy at: 1.78. When a company is over a value of “1” they have a good handle on their ability to pay their short term obligations.  The formula for the current ratio is:

Current assets / Current liabilities

McDonald’s Current Ratio 2021:

$7,148,500 current assets / $4,020,000 current liabilities = 1.78

This is one of the most important measurements of how well the company is prepared to pay their short term (less than 12 months) obligations.

Generally, the more a company focuses on inventory turnover, the lower the current ratio number may be. Regardless, a higher number is usually better, but if it’s too high, those assets can be better deployed to earn a high ROA. 

Kudos to McDonald’s for being so responsible with their cash to ensure short term payments are made. 

Debt ratio – Their debt ratio is understandably high, saying that 109% of their assets are financed by debt.  The formula for the debt ratio is:

Total liabilities / total assets

 McDonald’s Debt Ratio 2021:

$58,455,300 Total liabilities / $53,854,300 total assets = 109%

A debt ratio measures the amount of leverage used by a company in terms of total debt (liabilities) to total assets. A debt ratio of greater than 100% means a company has more debt than assets while a debt ratio of less than 100% indicates that a company has more assets than debt.

For McDonald’s and other capital intensive industries, when interest rates go up they will need to do some serious negotiating with their lenders. While they have some serious purchasing power, the federal funds rate will increase at some point affecting all their ratios.

Gross profit margin – The gross profit margin is a very important measure of how much money is left over after a sales transaction in order to pay for fixed expenses.  The formula for the gross profit margin is:

Sales – cost of goods sold (a.k.a “gross profit”) / total sales

McDonald’s gross profit margin 2021:

$12,580,200 gross profit / $23,222,900 total sales = 54.2%

Gross profit margin varies among industries. Service based models typically have higher margins compared to an inventory model.

Net profit margin – This important metric measures how much money is collected per dollar of sales revenue received. The formula for the net profit margin is:

Net income / net sales

 McDonald’s net profit margin 2021:

$7,545,200 net income (available to common stockholders) / $23,222,900 total sales = 32.5%

Net profit margin helps the business determine if the company is creating enough profit from sales operations and if it needs to be a better manager of the operating costs.

Return on total assets (ROA) – this important ratio tells the business how well they are managing the company assets. Going back to the current ratio, as an example, if they hold too much cash idly, this ROA will suffer. 

The formula for the return on total assets is:

Net income / total assets

 McDonald’s return on total assets 2021:

$7,545,200 net income (available to common stockholders) / $53,854,300 total assets = 14.2%

Sources

1. McDonald’s Corporation Financial Information 2021 Annual Report: https://corporate.mcdonalds.com/content/dam/gwscorp/assets/investors/events-presentations/meeting-resources/MCD%202021%20Annual%20Report.pdf
2. Yahoo! Finance: MCD: https://finance.yahoo.com/quote/MCD/financials?p=MCD
3. Yahoo! Finance: YUM: https://finance.yahoo.com/quote/YUM/financials?p=YUM
4. What is Operational Excellence and Why is it Important?: https://strategicmarketingpartner.com/what-is-operational-excellence-and-why-is-it-important/
5. Morningstar: https://www.morningstar.com/stocks/xnys/mcd/performance