Under What Conditions Can a McDonald's Franchise Agreement Be Terminated?

"Entrepreneur" magazine rated McDonald’s as the third-best franchise to launch, but it can be expensive, costing as much as $1.9 million in 2011. With 12,465 United States franchises, and more than 30,000 restaurants worldwide, McDonald’s is one of the most well-known brands in the world. Managing a franchise for the company that brought the world golden arches, Happy Meals and hamburgers is a significant undertaking. However, under certain conditions, a McDonald’s franchise agreement can be terminated by the company.

Ray Kroc is often credited with founding McDonald’s, however his idea was hatched from the work of two brothers in California, Dick and Mac McDonald, who owned a popular hamburger stand in California. Convinced that the brothers’ business idea could be expanded and applied elsewhere, Kroc persuaded them to go into business with him. The first McDonald’s restaurant opened in 1955 and the first franchise was sold that year.

Most McDonald’s restaurants are owned by independent operators who enter into a franchise agreement with the company. Franchisees must have a business background and the capital required to open a restaurant. “Entrepreneur” listed McDonald’s restaurant startup costs from $1,068,850 to $1,892,400. Franchise agreements are for 20 years and include a number of standards and legal requirements that franchisees must follow, including adhering to menu items, employee training, and the use of company products, such as soft goods. McDonald’s has terminated franchise agreements for a variety of infractions.

In 1972, Joan and Fred Fiore opened their first McDonald’s restaurant in Long Island City, N.Y. Eventually, the Fiores had five restaurants in that area. In a letter to the Federal Trade Commission, Joan Fiore outlined how McDonald’s began a defranchise process that commenced just before the couple’s 20-year franchise agreement was to end. The Fiores claimed that McDonald’s devalued one of their restaurants because no double-drive through was present, costing the couple $75,000 and forcing them to sell off all five restaurants. Effectively, the franchise agreement was terminated because the Fiores did not make mandated improvements to one or more stores.

In 1993, a pair of Mississippi McDonald’s restaurants were relinquished by its owners with one restaurant returned to McDonald’s and the other restaurant surrendered to the Internal Revenue Service to cover unpaid taxes. In a 1995 suit, McDonald Corporation v. Watson, the hamburger chain alleged that the two defendants had difficulty managing their restaurants and “were unable to honor their financial obligations to McDonald's in a timely fashion.” McDonald’s cited several material breeches to the McDonald’s agreement that took place with subsequent notice served by the company to the franchisees of its intent to terminate the franchise agreement. McDonald’s sued for damages as well as for “trademark infringement, rents, service fees, repair costs, and attorneys' fees.”

A McDonald’s franchise may be affected by where it is located, as some states regulate the sales of such franchises. The Federal Trade Commission outlines the steps that must be taken before a franchise can be sold. In some states, disclosure and registration also is required, with state officials reviewing such transactions before they can be approved. State intervention can make it more difficult to establish a new franchise, but it could also protect the franchisee who might be pressured to giving up his restaurant.