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Why Franchises Are Good for Investors

McDonald's (MCD)
Company Profile: McDonald's franchises and operates McDonald's restaurants in the food-service industry. The company and its franchisees buy food, packaging, equipment and other goods from numerous independent suppliers.
Share price return: 7.5% this year
Franchise locations: As of March 31, McDonald's had 32,805 restaurants, 26,398 of which were licensed to franchisees.
Revenue from franchises: Franchises accounted for 32% of McDonald's $6.1 billion in total revenue last quarter, or $1.96 billion. Company-owned restaurants pulled in about $4.2 billion in revenue.
Franchise costs: For a new McDonald's restaurant, the initial fee paid to McDonald's is $45,000, and the company estimates that equipment and pre-opening costs range from $1 million to $1.8 million. Franchisees also must pay a monthly service fee equal to 4% of monthly sales and a monthly base rent. McDonald's notes that relatively few first-time owner/operators get a new restaurant. McDonald's requires an initial down payment of 40% of the total cost for a new restaurant or 25% of the total cost for an existing restaurant. The company also requires a minimum of $500,000 of nonborrowed personal resources.
Analyst view: As a component of the Dow Jones Industrial Average, McDonald's has a large analyst following. Fifteen analysts, or nearly 58% of those covering the stock, say McDonald's is a "buy." Credit Suisse, Sanford C. Bernstein and Stifel Nicolaus are among those bullish analysts. The other 11 analysts following the stock rate it "hold."

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