#293 Ray Kroc The Making of McDonalds

In this episode, the host discusses the ease and efficiency of selling a business to Tiny, a company that offers straightforward cash exits for founders, drawing parallels to Warren Buffett's approach to acquisitions. Tiny, likened to the Berkshire Hathaway of the Internet, has a reputation for hassle-free transactions, responding within 48 hours, and closing deals within a month. The host also delves into Ray Kroc's autobiography, "Grinding It Out," exploring Kroc's relentless pursuit of McDonald's expansion and his strategic shift to owning real estate for franchise leverage. Kroc's unwavering dedication, work ethic, and the philosophy of seizing opportunities are highlighted, alongside his personal sacrifices and the eventual transformation of McDonald's into a global empire.

• Tiny offers straightforward cash exits for founders, facilitating the sale of businesses ranging from a million to over a hundred million dollars.
• Andrew and Chris, the founders of Tiny, are influenced by Warren Buffett and Charlie Munger's thinking in building their company.
• Selling to Tiny is described as hassle-free, with a quick response, offer, and closing time, resulting in a "bag full of cash."

"Tiny has been called the Berkshire Hathaway of the Internet." "Andrew and Chris have spoken about how the thinking of Warren Buffett and Charlie Munger has influenced the way that they are building Tiny."

These quotes highlight Tiny's reputation and the influence of Buffett and Munger's investment philosophies on its founders.

• Doug Leone describes a "killer" approach focused on getting the job done rather than just making money.
• Leone's philosophy emphasizes personal responsibility for happiness and problems.
• He believes in seizing opportunities, as evidenced by his transition from selling paper cups to leveraging the multimixer.

"You can tell that Doug has founder mentality. He says, 'We were killers. I want to make sure that you know that we were killers, not killers to make the most money, killers to get the job done.'"

This quote encapsulates Doug Leone's aggressive approach to achieving goals, not just for financial gain but for the satisfaction of accomplishment.

• Ray Kroc's autobiography "Grinding It Out" is discussed, highlighting the importance of execution over just the business idea.
• Kroc's wealth came from altering the McDonald's business model to own real estate and lease it back to franchisees.
• His work ethic and bias for action are evident from a young age, including his early business ventures and his decision to serve in World War I.

"I have always believed that each man makes his own happiness and is responsible for his own problems. It is a simple philosophy." "After 17 years of selling paper cups, I saw opportunity appear in the form of a milkshake machine called the multimixer, and I grabbed it."

These quotes reflect Ray Kroc's philosophy on personal responsibility and his keen eye for business opportunities, leading to the creation of the McDonald's empire.

• Kroc's autobiography details his relentless work ethic and ambition from a young age.
• He started businesses, including a lemonade stand, and saw work as play.
• Kroc's early career included selling paper cups and playing the piano to support his family.

"When I dreamed about having a lemonade stand, it wasn't long before I set up a lemonade stand." "I worked hard at it and I sold a lot of lemonade."

These quotes show Kroc's proactive nature and his belief in turning dreams into reality through action and hard work.

• Kroc was intrigued by the McDonald brothers' success with his multimixer and saw the potential for nationwide expansion.
• Despite initial resistance from the McDonald brothers, Kroc persuaded them to franchise their operation with him.
• His vision included not just selling multimixers but creating a steady flow of cash through a chain of McDonald's restaurants.

"The mental picture of eight multimixers churning out 40 shakes at one time was just too much to be believed." "I leaned forward and said, 'Well, what about me?'"

These quotes capture Kroc's realization of the McDonald's potential and his pivotal role in proposing and initiating the franchise model that would revolutionize the fast-food industry.

• Kroc's alteration of the McDonald's business model by owning the real estate was a key factor in his success.
• Similar to Ralph Lauren's shift from manufacturing to licensing, Kroc's change in strategy from just earning a percentage of sales to real estate leasing amplified his wealth.

"He made more money than other fast food chains by altering his business model, where he'd actually own the real estate and then lease it back to the franchisee."

This quote illustrates the strategic business model innovation that differentiated Kroc's approach and contributed significantly to his financial success.

• Kroc's autobiography emphasizes his prioritization of work over personal life, often at the expense of his relationships.
• His rigorous work schedule and dedication are portrayed as both a strength and a source of conflict in his personal life.

"I was driven by ambition. I was determined to live well and have nice things, and we could do so with the income from my two jobs."

This quote reflects Kroc's intense focus on work and ambition, which was fundamental to his success but also a point of contention with his family life.

• Ray Kroc's father died due to the stress of financial ruin following the market crash.
• Ray Kroc's work ethic and determination were influenced by his father's principled conservatism.
• Ray Kroc's father's death was marked by financial struggle, as evidenced by the garnishment notice on his wages.

"He died of a cerebral hemorrhage in 1930. He had worried himself to death."

This quote highlights the extent of the financial and emotional stress Ray Kroc's father experienced, which ultimately led to his death.

• Ray Kroc sold paper cups for 17 years before moving on to sell multimixers.
• The multimixer invention was critical to Ray Kroc's career, leading him to the McDonald's opportunity.
• Prohibition indirectly boosted Ray Kroc's paper cup sales due to the rise of soda and milkshake fountains.
• Ray Kroc's wife, Ethel, was skeptical of his decision to leave a stable job for the risky multimixer venture.

"The multimixer was the invention that really made big volume milkshake production possible, and it changed the course of my life."

Ray Kroc acknowledges the multimixer as a pivotal invention that opened the door to his future success with McDonald's.

• Ray Kroc was determined and unyielding in his business decisions, often risking personal finances.
• Ethel's refusal to support Ray's business ventures caused a rift in their marriage, leading to estrangement.
• Ray Kroc's persistence led him to mortgage his home to buy out a bad business deal.
• He developed a coping mechanism for stress by focusing on one problem at a time and ensuring adequate sleep.

"I felt betrayed. That was when I began to understand the meaning of the word estrangement."

This quote reflects the personal cost of Ray Kroc's ambition and the strain it placed on his marriage.

• Ray Kroc's initial business arrangement with his employer for the multimixer was disadvantageous.
• He became a "one-man band," personally handling sales and operations.
• Ray Kroc's realization of a dwindling multimixer business prompted him to seek new opportunities.
• He became intrigued by the McDonald brothers' efficient operation, which used multiple multimixers.

"I was further contractual clauses that obligated me to follow their plans down to the last detail, too, even to signs and menus."

This quote shows Ray Kroc's oversight in accepting a contract with the McDonald brothers that limited his control and later caused issues.

• The McDonald brothers perfected a simplified and efficient fast-food model.
• Ray Kroc made crucial mistakes by acting as his own attorney and accepting poor financial terms.
• Contract clauses required strict adherence to the McDonald brothers' plans, causing future conflicts.

"Make every detail perfect and limit the number of details to perfect."

This quote encapsulates the McDonald brothers' approach to business that Ray Kroc admired and sought to emulate.

• Ray Kroc's dedication to the McDonald's franchise was evident in his hands-on approach.
• His attention to detail and cleanliness standards were uncompromising.
• Ray Kroc's relentless pursuit of perfection sometimes led to harsh interactions with employees.

"Perfection is very difficult to achieve, and perfection was what I wanted in McDonald's. Everything else was secondary."

This quote reveals Ray Kroc's obsession with achieving the highest standards for McDonald's, which he viewed as essential to the brand's success.

• Ray Kroc's autobiography does not seek to portray him as likable but rather as driven and ruthless.
• His aggressive business tactics and persistence are highlighted as key to his success.
• The book and its adaptation into a movie, "The Founder," offer insight into Ray Kroc's character and business strategies.

"If my competitor was drowning, I'd put a hose in his mouth."

This quote from the movie adaptation of Ray Kroc's story exemplifies his cutthroat approach to business competition.

• Harry Sonborn's financial strategy was pivotal for McDonald's expansion.
• Ray Kroc acknowledged the significance of Harry's idea for McDonald's growth.
• The strategy shifted McDonald's focus from selling franchises to developing restaurants and ensuring repeat business through a system's reputation.
• A continuous program of educating franchise operators and reviewing their performance was necessary.
• Research and development were crucial, but required substantial funding.
• Harry's solution involved forming the Franchise Realty Corporation, which allowed McDonald's to own the land and lease it to franchisees.
• This real estate approach provided a steady revenue stream and capital for further expansion.
• The real estate business model was a breakthrough that allowed access to large pools of capital and targeted life insurance companies for investment.

"The only practical way for McDonald's to grow as we envisioned, would be for us to develop the restaurants ourselves."

This quote emphasizes the strategic shift from franchising to restaurant development as a means to scale McDonald's business effectively.

"Harry's solution, the formation of franchise Realty corporation, was, to my mind, a stroke of financing genius."

Ray Kroc highlights Harry Sonborn's innovative approach to financing McDonald's growth through real estate, which he considered a stroke of genius.

• Harry Sonborn's idea was to focus on the real estate aspect of the business rather than just the burger sales.
• Owning the land and leasing it to franchisees allowed for a consistent and upfront revenue stream.
• This strategy fueled McDonald's rapid expansion and provided greater capital for further land acquisition.
• The real estate model was transformative for McDonald's, enabling it to grow from a few dozen to thousands of restaurants.

"You're not in the burger business. You're in the real estate business."

This quote from the movie encapsulates the essence of Harry Sonborn's strategy, indicating that the real business of McDonald's was in real estate, not just selling burgers.

"This will provide you with two things... a steady upfront revenue stream... and greater capital for expansion."

The quote outlines the two main benefits of the real estate strategy: a reliable source of income before construction and the capital necessary for continued growth.

• Ray Kroc's career path was non-linear, leading from selling paper cups to owning a fast-food empire.
• The progression of his career only made sense in hindsight, illustrating the unpredictability of success.
• Kroc believed in the potential of McDonald's, as did Harry Sonborn, who predicted the company's massive growth.
• Harry's trip to San Bernardino and his conversation with Dick McDonald showcased his confidence in McDonald's future.
• Ray Kroc's commitment to McDonald's demanded personal sacrifices from himself and his team.
• The narrative reflects on the cost of such sacrifices, particularly for those who neglected family obligations for the business.

"It is not what you do, it's how you do it."

This quote reflects Ray Kroc's belief that the method of conducting business is more critical than the business itself, a theme that runs throughout his career.

"I thought you had a genuine nut on your hands, Ray."

Dick McDonald's reaction to Harry Sonborn's ambitious prediction for McDonald's future shows the disbelief and surprise at the scale of Harry's vision.

• McDonald's faced financial obstacles, such as the need for capital and dealing with unsupportive banks.
• The company initially used bank mortgages and later targeted life insurance companies for investment.
• Ray Kroc's financial dealings were complex, often involving significant risk and leveraging personal assets.
• The shift to owning company stores and selling stock was a strategic move to protect the company's downside.

"The Twelve apostles want the McDonald's brothers. What? They were getting the half a percent of gross sales of all McDonald's stores."

This quote explains the deal that allowed Ray Kroc to buy out the McDonald brothers using funds from twelve charitable and educational institutions, dubbed the "Twelve Apostles."

• The commitment to McDonald's led to personal sacrifices, such as missing family events.
• Ray Kroc's personal life, including his relationships and marriages, was tumultuous and intertwined with his business dealings.
• Ethical considerations are raised regarding Kroc's treatment of his employees and their personal sacrifices for the company's success.

"Missing your kid's birthday to sell 15 cent hamburgers is whack."

This statement criticizes the extreme personal sacrifices that were expected from McDonald's employees, highlighting the potential negative impact on their personal lives.

• Ray Kroc had a strong belief in the power of advertising and saw it as an investment rather than an expense.
• The divergence in attitudes towards advertising between Kroc and the McDonald brothers was a source of tension.
• Kroc's approach to advertising was aggressive and forward-thinking, aimed at expanding McDonald's visibility and success.

"I never hesitate to spend money in this area because I see it coming back to me with interest."

Ray Kroc's quote underscores his confidence in the return on investment from advertising and public relations, which he viewed as essential for the growth of McDonald's.

• Ray Kroc viewed McDonald's as his religion, expressing a fervent faith in the brand.
• His extreme dedication was reflected in his aggressive business practices, including firing long-term employees if they hindered growth.
• Kroc's belief in constant expansion and advertising investment drove McDonald's success.
• Despite personal unhappiness, Kroc's focus remained unwavering on McDonald's growth.

"Ray's a very extreme dude. He's not hiding it. And the reason being is because he views McDonald's as his religion."

This quote emphasizes Ray Kroc's intense dedication to McDonald's, likening his commitment to a religious fervor.

"I speak of faith in McDonald's as if it were a religion. That is exactly the way I think about it."

Kroc's own words underline his devout belief in McDonald's, equating it to a spiritual faith.

"It turned Californians into our parking lots. As though blindfolds had been removed from their eyes."

This quote illustrates the success of Kroc's advertising campaign in California, which significantly boosted McDonald's business there.

"The key element in individual success stories and McDonald's itself is determination."

Kroc attributes the success of McDonald's to determination, underscoring his philosophy that persistence is critical in business.

• Kroc advocated for a decentralized management structure, believing it encouraged growth and attracted strong individuals.
• He felt that too much corporate control stifled innovation and would drive away talented people.

"I maintained that authority should go with the job. Some wrong decisions may be made as a result, but that's the only way you can encourage strong people to grow in an organization."

Kroc's quote reflects his belief in empowering employees with authority to foster their growth within the company.

"It's lonely on top. I've never felt this so keenly as when Harry and I had our final confrontation and he resigned."

This quote reveals the isolation Kroc felt at the top of the corporate ladder, especially during significant disagreements with his partners.

• Kroc's personal life was tumultuous, with multiple marriages and intense emotions.
• Despite personal challenges, he remained committed to McDonald's, working there until his death.
• Kroc's mantra of "press on" encapsulates his belief in the power of persistence over talent or education.

"I should have been happy. But the undeniable fact was that I was miserable."

Kroc acknowledges his personal unhappiness despite his professional success, indicating the complexity of his character.

"At last I felt like I was a complete person. Now I told myself I could take life a little easier and enjoy it."

This quote shows Kroc's search for personal fulfillment, which he temporarily found in his third marriage.

"Nothing recedes like success. Don't let it happen to us or you."

Kroc's insistence on continual progress and success reflects his relentless drive to expand McDonald's.

• Warren Buffett offers a unique proposition to business owners looking to sell: a promise of autonomy and long-term ownership.
• Buffett's letter to a potential seller differentiates Berkshire Hathaway from other buyers by emphasizing respect for the seller's life work and a hassle-free process.

"We buy to keep. All of the businesses we own are run autonomously to an extraordinary degree."

Buffett's quote highlights his acquisition philosophy of buying businesses to hold onto them and allowing them to operate independently.

"I invite you to check with them as to our performance versus our promises."

Buffett encourages potential sellers to verify Berkshire Hathaway's track record, showcasing transparency and integrity.

"I would be extraordinarily proud to have Berkshire, along with the key members of your family, own [your business]."

This quote demonstrates Buffett's personal touch and respect for the family businesses he seeks to acquire, indicating a partnership rather than just a transaction.