Dealing with Business Rejection, the McDonald’s Franchise Disclosure Document, and a $114 Million Coffee Fortune
From time to time, I get messages from business owners or entrepreneurs who are discouraged and upset. Their family, friends, colleagues, bank officers, or suppliers don’t believe in what they are trying to do and they take it personally. This afternoon, as I sat in a McDonald’s restaurant having coffee and revisiting an excellent book called McDonald’s Behind the Arches that details the historical rise of one of the world’s largest real estate portfolio masquerading as a hamburger chain, I was reminded of a story I first read back in college that I think has a lot of powerful lessons.
In 1955, Ray Kroc needed to come up with $25,000 for his new franchise business to buy out the last holder of territory rights for McDonald’s. Adjusted for inflation, that was around $222,000 today. After being turned down by multiple banks, he offered everyone around him a chance to buy a 50% ownership stake in his business if they gave him the money. No one took him up on the deal. Today, those shares would be worth tens of billions of dollars and would have transformed the family that held them into one of the richest in the world.
The moral? You could be sitting on one of the best business ideas in history and people will still turn you down or reject you. Don’t take it personally. It has nothing to do with you nor does it have to determine your future. Don’t get angry or burn bridges, either, as you never know when they will come back around and want to partner with you. Plenty of people who passed in the early days ended up with their own McDonald’s franchise and / or shares of the company following the IPO. Nobody owes you anything. In the words of one of the leading fashion personalities of the past generation: Make it work.
In the past week, we’ve visited McDonald’s four or five times at various parts of the day to watch the operation. I’ve been reading one of my favorite books about the history of the company that is so good, I have a couple of copies in my library. You could teach an entire college course on the lessons in it. I took this photo of the counter when the staff wasn’t around so I could study the layout. I also have begun tracking all of the suppliers and that has been a fun adventure. One example: For decades, Gaviña Gourmet Coffee has supplied McDonald’s with its beans. This business is still family owned out in California and they are one of the top selling coffees in the Los Angeles market. It roasts 40 million pounds of coffee a year and does $114,000,000 in annual sales with 20% of that revenue coming from a combination of McDonald’s, CostCo, and 7-Eleven. It supplies Wal-Mart, Safeway, and other grocery store chains, as well. It’s a silent empire hidden in plain sight and next on my list of case studies. This is the great thing about investing – one idea can lead you to many, many others.
If the idea is good, and if you are as talented as you think, you will find a way to make it work. You are never dependent on a single investor or a single bank loan to launch your career (in fact, you should avoid being in that position at all costs as it is dangerous). You are the asset and you need to remember it. Feeling dejected is a waste of both time and energy. In less than a few days, Kroc negotiated an innovative solution that involved getting a rebate from the original McDonald’s brothers, which gave him the collateral to secure the remainder on a loan; collateral that didn’t exist before he figured out how to manufacture it out of thin air by structuring a mutually advantageous deal that worked in everybody’s favor.
If you’ve never read the book, I highly recommend you stop what you are doing and go buy a copy. It will be the best $12.87 you’ve spent in awhile. Kroc was a genius. He broke all of the rules of franchising at the time by aligning the incentives of the restaurant owners and his parent franchise organization so they were on the same team. He didn’t take kickback rebates from suppliers. He didn’t sell food or equipment to the restaurants. He only wanted to win by making his franchisees successful so he lived and died on the annuity stream he created in the form of rent for the property and a cut of sales. As the system grew bigger, he used the combined purchasing power to buy ingredients, signage, refrigerators, etc. for cheaper and then passed all of those savings onto the local owners so their margins increased. This, in turn, allowed him to attract an army of entrepreneurs who were working day and night to build the system that sent him ever-increasing monthly checks.
Buy the book! Buy the book and read it! New copies are only $12.87 and used copies are $0.01 on the Amazon used marketplace.
Also, those of you who are interested in the operational side of a business like McDonald’s need to thank Tyler L. He sent me a message after I wrote about McDonald’s two weeks ago, explaining how the Minnesota CARDS database is publicly accessible and the state requires companies to publicly file their franchise disclosure documents. It turns out that California, Washington, and Wisconsin do the same thing and it is much more convenient than filling out non-disclosure agreements and requesting them directly from the company. If you want to see the numbers, contracts, rent schedules, fee schedules, and other behind-the-scenes information for a McDonald’s franchise, you can download the filing here. Brace yourself for a business geek out because it’s 383 pages of information. It makes me love the company even more and proud to be a stockholder.
Between the 10K filing / annual report and the franchise document, you can learn almost everything you need to know about the business. I love the economics. I know it’s in a period of slow growth right now that makes Wall Street hate the firm but I can’t help but be seduced by the returns on capital and streams of money generated from more than 35,000 properties around the world.
I have a lot to get done tonight but I find myself wanting to study McDonald’s more. It’s like a family tree that ties into dozens of other companies that also need their own case studies; fortunes built out-of-sight by suppliers (there is one family that sold a business generating more than $100,000,000 in annual sales as the supplier of shortening!). I need to breakdown and analyze the entire system. I can’t think about anything else. It’s what is on my mind in the morning when I wake up and before I go to bed in the evening. I even have a set of vintage McDonald’s coffee mugs I’ve been drinking out of for the past week.
