McDonald's grants franchisees rights only to operate at a specific restaurant location and provides no exclusive territory, protected area, or right to prevent competing McDonald's outlets nearby.

Without any territorial protection, McDonald's retains the contractual right to open new company-owned or franchised restaurants that directly compete with an existing franchisee's customer base, with no obligation to compensate the affected franchisee. Internal development policies referenced in the FDD explicitly do not create any contractual right and may be changed at any time. This means a franchisee investing $1.4M–$2.7M has no assurance that a competing McDonald's will not be opened nearby, potentially cannibalizing sales and undermining the return on investment. The combination of no territory protection and McDonald's rights to sell products through alternative channels (e.g., McCafe packaged coffee in supermarkets) further limits the franchisee's exclusive commercial opportunity.

McDonald's owns or controls the real estate and leases it back to franchisees via an Operator's Lease that terminates automatically when the Franchise Agreement ends, leaving franchisees with no independent property rights.

Because McDonald's controls the real estate, a franchisee who loses their franchise for any reason—including non-renewal at McDonald's discretion—loses access to the premises immediately, with no ability to continue operating the business, sublease, or sell the real estate independently. This structure means the franchisee's entire capital investment in equipment, signage, and decor is exposed to forfeiture upon termination or non-renewal, since those assets are secured under the Bank of America loan guarantee program and tied to the restaurant premises. The rent structure—base rent plus fixed percentage rent on gross sales—creates a significant recurring cost that escalates with revenue, meaning franchisees pay more in rent as their sales grow, compressing operating margins. Prospective buyers should understand that they are acquiring a license to operate at a location McDonald's controls, not a real estate-backed business with independent asset value.

Franchisees have no contractual right to renew their franchise; McDonald's may offer a new term at its sole discretion, and any new term requires signing the then-current Franchise Agreement, which may contain materially different fees, standards, and obligations.

A franchisee who invests $1.4M–$2.7M in a traditional McDonald's must complete their 20-year term without any guarantee that a renewal will be offered, and if an offer is made, it will require executing the then-current franchise agreement with whatever terms are in effect at that time, including potentially higher royalty rates or revised rent structures. As a condition of receiving a new term offer, franchisees are typically required to update the restaurant to current standards (at their own cost) and sign a general release of all claims against McDonald's, eliminating any ability to challenge prior conduct. The 20-year initial term may appear long, but given the capital-intensive nature of periodic required remodels and system upgrades during the term, a franchisee's net return could be substantially reduced if renewal is denied or offered only on significantly less favorable terms. This structure places the franchisee entirely at McDonald's discretion at the end of the term, with no independent leverage.

The Franchise Agreement imposes a post-termination non-compete that restricts franchisees from participating in competing quick-service restaurant businesses for 18 months within 10 miles of any McDonald's system location.

The non-compete applies for 18 months following termination and extends to a 10-mile radius around any McDonald's system location—not just the franchisee's own restaurant—which in densely populated markets could effectively prohibit participation in the fast-food or quick-service restaurant industry across an entire metropolitan area. The restriction is framed broadly enough to potentially cover involvement as a creditor, investor, or landlord in a competing concept, limiting the franchisee's ability to redeploy capital after the franchise relationship ends. Given that McDonald's has over 13,500 U.S. locations, the geographic reach of the non-compete based on proximity to any system location could render it functionally national in scope in major urban markets. Enforceability varies significantly by state, and a franchisee who does not proactively assess this risk before signing may face significant legal costs if they later wish to operate in the restaurant sector.

Franchisees are required to contribute at least 4% of Gross Sales annually to advertising and promotion, but McDonald's retains sole discretion over how funds are spent, and the fund is not subject to independent audit or proportional spending requirements.

The FDD confirms that McDonald's does not maintain a traditional advertising fund and that OPNAD contributions (currently 2.25% of sales) are managed at the cooperative level, but the overall minimum 4% advertising obligation is unilaterally controlled with no contractual requirement that spending benefit the franchisee's specific market. There is no disclosed requirement that advertising funds be audited by an independent auditor, no obligation to spend funds proportionally across the system or in proportion to franchisee contributions by region, and McDonald's retains sole discretion over all national advertising spending decisions. This means a franchisee in a smaller market could be contributing millions of dollars annually in advertising fees while receiving disproportionately less benefit from national campaigns compared to higher-density urban markets. The inability to verify fund expenditure or challenge allocation decisions is a material limitation on the franchisee's ability to assess the return on their advertising contribution.

Item 19 discloses annual gross sales data for approximately 12,572 traditional restaurants but does not provide full franchisee-level profit and loss statements, making it difficult to assess actual owner earnings after all costs.

The disclosed average annual sales of $3,966,000 for franchised traditional restaurants represents total revenue, not net income to the franchisee—and does not account for the significant occupancy costs (base rent plus percentage rent), royalties of 4%–5% of gross sales, advertising contributions of at least 4% of gross sales, labor, food, and operating costs that franchisees bear. The pro forma statements provided at $3M–$3.4M sales levels show operating income before occupancy costs of $734,000–$879,000 (24.5%–25.9% of sales), but occupancy costs for a McDonald's franchisee can be substantial given the rent structure tied to McDonald's acquisition and development costs. Company-owned McOpCo restaurants averaged $4,793,000 in annual sales—materially higher than franchised locations—meaning McOpCo performance data does not reflect the typical franchisee experience. Prospective buyers must independently model full operating costs including rent, royalties, advertising, labor, and debt service before drawing conclusions about franchisee profitability.

Franchisees must purchase 90%–95% of establishment goods and 55%–65% of ongoing operating supplies from McDonald's-approved suppliers, and McDonald's received approximately $39 million in fees and rebates from supplier arrangements in 2024.

The mandatory approved supplier requirement effectively eliminates franchisee purchasing discretion for nearly all major cost categories, preventing franchisees from seeking competitive bids or lower-cost alternatives even when equivalent quality products may be available. McDonald's received $39 million in supplier fees and rebates in 2024 related to these arrangements, representing a financial benefit to McDonald's derived from the mandatory purchasing obligations that franchisees fund through their purchasing activity. While the FDD discloses this revenue, it does not disclose the full amount of supplier pricing premiums that may be embedded in approved supplier costs, meaning the true cost of the supply restriction to franchisees could exceed the disclosed rebate figure. Franchisees should understand that this structure means their food, equipment, and technology costs are set by a system in which McDonald's has a financial interest in the outcome.

In 2024, McDonald's recorded 843 franchisee-to-franchisee transfers, 29 terminations, 15 non-renewals, and 8 reacquisitions by the franchisor, representing meaningful system turnover that prospective franchisees should investigate.

The 843 transfers in 2024 represent approximately 6.5% of all franchised outlets changing hands in a single year, which—while not necessarily negative—indicates a high degree of franchisee turnover and raises questions about the underlying drivers, including whether profitability, rent economics, or operational demands are motivating exits. The 29 terminations, 15 non-renewals, and 8 franchisor reacquisitions in 2024 represent 52 outlets that ceased operating as independently franchised locations through closures, terminations, non-renewals, and other ceased operations, which should be reviewed in the context of McDonald's stated New Term Policy and termination criteria. While franchised outlet count grew by a net 115 in 2024, this growth occurred alongside significant turnover activity, and the former franchisee list in Exhibit S may reveal patterns in which markets or operators experienced terminations or non-renewals. Prospective franchisees should investigate whether the high transfer rate reflects a liquid, well-functioning resale market or indicates franchisee dissatisfaction and exit pressure.