You, of course, know who Ed Bailey is. He owns the Patrizio restaurants and the new Bailey’s Prime Plus. He’s also one of the biggest McDonald’s franchisees in the country — for now. Bailey is set to sell his 63 restaurants, probably by year’s end. Which got us to wondering what 63 McDonald’s might be worth. I asked someone who’d know. Here’s his back-of-the-envelope ciphering:
These types of franchises are typically valued at 5 to 6 times EBITDA. A McDonald’s unit will gross around $2.2. This is huge volume. The average sale per person is $3, and about 88 percent of that is the cost of sale. So 12 percent of $3 is 36 cents. That’s EBITDA per customer. 2.2 million divided 3 equals 733,333 customers per year. 733,333 times 36 cents gives you EBITDA of $264,000. $264,000 times 5 equals $1,320,000. Obviously there are many other factors, but $1.3 million is probably very close.
Let’s round up, then, and call it $80 million. To Ed Bailey, we say: nice.
Correction: The answer was correct, but the math was a bit hinky when I first posted this; it has been corrected.
24 comments
well thats a good think since Bailey’s Prime will most likely not make it.
I was told there would be no math.
That math doesn’t take into account a couple of things….the worth of the franchise itself, which can be as high as $1,000,000 per store and the cost of the real estate, which can be another mil
Always round down.
That post is internally inconsistent. If he makes $0.36 of EBITDA for each dollar of revenue then the EBITDA for a store with $2.2 million of revenue would be $792k. Not sure why the author switched from his own metric of $0.36 of EBITDA per dollar of sales to $0.36 of EBITDA per customer, but he did.
First of all, your commentator’s analysis is all wrong. You don’t multiply cash flow by number of customers. (WTF?) Secondly, I sincerely doubt that a McDonald’s unit generates 36% in cash flow on sales. (That would put it with top earners like Microsoft and Oracle — where the margins are eye-popping because they have essentially no cost in their software.)
More likely, McDonald’s earns 18-20% on sales — meaning a unit with $2.2MM in sales would produce $440,000 in EBITDA. Based on a 5 multiple, the sales price would be $2.2 million (or one times sales) — but less debt on the business, which could easily be a couple of hundred thousand.
In other words, we don’t know what the heck Bailey will make on the sale.
Grant and RAB beat me to it. I’m guessing RAB’s math is in the ballpark and that he’ll gross something in the $120-140MM range. Deduct any debt on the business from that and you have his net.
Doug, the value of the franchise, as any asset, is what you can earn from it (whether explicitly or implied, as in the implied rent on a home you occupy).
Original calculations = flawed, erroneous, whatev
Grant = better
RAB = much better
And let’s not confuse what he “gets” with what he “makes”. Each of those restaurants required a significant outlay of Mr. Bailey’s funds, in construction costs, land costs, franchise fees, opening, etc.. He “makes” only the portion over the cost of building this empire.
Note to self- ditch the hot and racy fictional restaurant novel idea – get a McDonalds – 18-20%? WTF.
“Correction: The answer was correct, but the math was a bit hinky when I first posted this; it has been corrected.”
Tim Rogers for Texas State Comptroller?
Wonder if Mr. Bailey will give a bonus to any of the overworked, underpaided teenage workers, who have helped made his wealth possible over the years. Maybe he’ll pay for their college tuition? Maybe he’ll give them a lifetime credit at McDonald’s? My guess is they’ll be lucky to get a bag o’ french fries.
@Amy S: As you can see from the updated post, it’s more like 12 percent. Sorry for the confusion.
RAB is correct: while your Someone Who’d Know source, Tim, has some interesting views on financial valuation as well as challenged math.
But most importantly, Rogers: I am really concerned as to where you are sourcing your Financial Expertise these days.
@Long memory, in regard to your concern for “underpaided teenage workers”, they learned valuable work experience, and the fact that they’d better learn some marketable skill if they want to get ahead in life. Working at a fast food restaurant is fine work, but in order to be higher wages or a bonus, you must develop some truly marketable skill that is of high demand.
That may be the worst back of the napkin (more apropos) analysis I have ever seen.
Long Memory – You should read the article that D CEO did on Mr. Bailey before making that comment. My concern would be can Mr. Bailey’s corporate culture be maintained by whoever buys him out.
Tim: Bailey told me in March that he was expecting a payday of at least $150 million.
@Glenn: One presumes the soon-to-be (if not already?) ex-Mrs. Bailey likes your figure better than mine. It’ll be her payday, too.
usually, the land is owned by McDonalds Corporate, and leased to the franchise.
Does that mean that Patrizio’s will close? And something new will be added In Highland Park Village???
I don’t think I’ve ever seen so many incorrect assumptions in one place!
Bailey does not own the real estate or the buildings. Those are always owned or controlled by McDonald’s Corporation.
In addition Bailey is a joint venture partner. He only owns a portion of the
business. McDonald’s Corporation owns the balance.
You can’t value a business by counting customers. In McDonald’s we have to value each location independently depending on its unique P&L, rent to McDonald’s, the age and condition of the building, and the remaining
term of the franchise. Plus many other factors.
re: Bailey’s Prime Plus/Park Lane. Looks like Bailey has a real hit on his hands with his new steakhouse. Texas Monthly dining critic Pat Sharpe has named it her “favorite new restaurant” and given it a great review in the November issue.
http://www.texasmonthly.com/food/patspick
If owned all of the real estate, 150MM or so. Without that, say 50 or less.
Please, please!!! Lets get something better than Patrizio!!! Clearly, they haven’t cared for a long time.