Investors Love the Franchise Model, Until They Hate It

Investors in fast-food chains have long appreciated the steady income from franchise fees, but that model comes with risks that aren’t apparent on an income statement -- especially if conditions change, like labor costs going up faster than menu prices.

The most well-known historical franchise model might be McDonald’s. It’s been said that McDonald’s is more of a real estate company than a restaurant company. The McDonald’s model is buying the real estate for future McDonald’s locations, leasing it to franchisees, taking a cut of the store’s revenue, and watching the profits roll in. The company owns tens of billions of dollars’ worth of real estate. Owning the real estate gives McDonald’s leverage over franchisees. It's no wonder that other chains would want to come up with some version of the model.