Term Paper: Mcdonalds Macdonald's Is a Name

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MacDonald's is a name that is globally associated with fast food and particularly hamburgers. What makes the company unusual is that it is not run by a single entity or person, but that it has many different managers and owners worldwide. This is made possible by McDonald's franchising system. The company has therefore expanded worldwide to become one of the largest and most successful companies in the world.

Many companies select the legal structure option of a subchapter s corporation. This has specific advantages, mainly in terms of taxes. Subject to certain conditions, a company has the option of applying for subchapter S corporation or C corporation status. Smaller companies generally choose the S corporation option.

A company qualifies for subchapter S corporation status when it has no more than 75 stockholders. As a very large company McDonald's certainly has more than 75 stockholders and can therefore not qualify for subchapter S status. On the other hand, overseas franchises beginning with a single restaurant operate as privately owned companies under the McDonald's name. Depending upon local legislation, as well as the franchise agreement, these businesses could then meet the requirements for a subchapter S corporation. The parent company in the United States however will classify as a C corporation.

MacDonald's is a many-faceted company run by many different franchisees all over the world. The franchisees, suppliers and managers that form part of the McDonald's team are all carefully trained to adhere to the international principles of the parent company. Once trained and running their own franchises, franchisees are independent entrepreneurs, who run their local McDonald's restaurants with their own capital. Approximately 70% of McDonald's worldwide restaurants are owned by independent franchisees. Some hold that the company's current status as worldwide, successful business warrants a different structure in terms of franchise. This opinion entails that it would be more profitable for the parent company to run its other businesses under their own ownership, rather than offering them to independent franchisees. There are however a number of good reasons to operate by means of franchises.

One of the reasons is the company's history. McDonald's has been a franchising company since its establishment in 1955. Although initially owning all companies, McDonald's began recruiting independent franchisees in the mid-1980's. This has proved to be a successful strategy, as the company has rapidly expanded worldwide. Franchising provides the main advantage that an already successful concept is able to expand more rapidly than through company ownership. The reason for this is capital savings. Because franchisees operate from the basis of their own capital and personnel, the parent company can focus on local expansion opportunities while also rapidly expanding in other parts of the world. Relatively little capital expenditure is therefore needed by the franchisor in order to rapidly expand large territories via franchisees.

A possible disadvantage is the laws governing the franchise relationship. Termination and renewal rights of the franchisee may be affected by these laws, as well as the franchisee's right to cure a default under the agreement. Another potential disadvantage is that either the franchisor or franchisee may become disenchanted with the relationship, although they are then still obliged to honor the contract until its termination. The franchisee may for example begin to feel that the franchisor is intruding on his or her business, and resent the need to pay royalty fees for the franchise.

McDonald's approach focuses on making their relationships with franchisees as profitable and beneficial for all involved as possible. Franchisees for example receive continual support from the McDonald's system, in terms of training, advertising, marketing and other areas of running their business. Franchises are offered only to individuals and not to companies, groups or passive investors. Through this principle, the parent company is able to enter into a personal relationship with each franchisee.

McDonald's also ensures that the company's overall standards of quality and service are maintained by means of a nine-month training program for all franchisees. An individual who meets the initial requirements to be a franchisee must go through this program before being able to enter into a franchisee relationship with the company. Another company requirement is that franchisees must be actively involved in the operation of the restaurant on a daily basis, while also not being involved in any other business interests. In this way, the quality, uniformity and profitability of the business are ensured.

Elements of business drive such as recruiting, marketing, accounting, administration and all aspects of running the business is the responsibility of the franchisee. The way in which the brand is represented to the local community is also the responsibility of the franchisee. The advantage of this is the fact that, being from the local community, the franchisee understands the specific cultural and local nature of the community. In this way, marketing can be handled in a more targeted way than the case would be if managers from the parent company were to operate at these locations. Because local franchisers operating in their own countries understand their customer base on a cultural level, they can then be instrumental in rapidly expanding the McDonald's brand. This benefits not only the local franchisee, but also the business as a whole in terms of growth and revenue. In addition to the above, the franchisee's responsibilities include supplying raw materials, goods and services to their restaurants. To ensure consistency and quality, these items must be approved by McDonald's.

Under the franchise agreement, which lasts for a period of twenty years, the parent company holds the head lease to the property and buildings used. The equipment inside the buildings are purchased and owned by the franchisee. All buildings and decor must be maintained by the franchisee to ensure the high standard expected by customers. This is done under the fully-repairing lease from McDonald's, which lasts for the same length of time as the franchise period.

In terms of finance, McDonald's does not provide financing for the purchase of a franchise, and the purchaser is required to have at least 25% of the purchase price available in non-borrowed capital, while the rest can be supplied by a bank. This is another way in which McDonald's protects itself financially. Any losses in terms of business are then carried by the franchisee and the financing bank.

In general, McDonald's principle is to franchise one restaurant at a time. The aim is to choose franchisees who are able to expand to multiple restaurants within a period of three to four years. The franchisee must prove that he or she can develop the restaurant according to McDonald's existing excellent standards. On this condition, additional restaurant franchises are granted. This approach allows both franchisor and franchisee to protect themselves in terms of possible issues like those mentioned above. Being aware of the royalty and excellence requirements, the franchisee is not in a position to legitimately become resentful of any requirements later along the line. The nine-month training period, as well as the thorough and informed way in which franchisees are recruited and prepared, therefore protects both the company and its franchisees. At the end of the franchise term, the franchise can be renewed for another twenty years, depending upon the franchisees desire to do so and McDonald's assessment of the franchisee's performance.

McDonald's decision to continue with the franchising rather than ownership paradigm is beneficial in a number of major ways. Firstly, the fact that franchisees own local businesses empowers them not only in terms of business opportunity, but also in terms of expanding the business according to local expertise and requirements. Local business owners tend to be greatly motivated to make a success of their franchise. This offers McDonald's the opportunity not only for more rapid global expansion, but also for a targeted approach that means greater success.

In terms of revenue,… [END OF PREVIEW]

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Mcdonalds Macdonald's Is a Name.  (2007, March 11).  Retrieved June 16, 2019, from https://www.essaytown.com/subjects/paper/mcdonalds-macdonald-name/69365

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