The Making of McDonald's: The Biography of Ray Kroc

I have always believed that each man makes his own happiness and is responsible for his own problems it is a simple philosophy I find that it functions as well for me now that I'm a multi-millionaire as it did when I was selling paper cups for $35 a week and playing the piano part-time to support my wife and baby daughter it follows that a man must take advantage of any opportunity that comes along and I've always done that too 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 it wasn't easy to give up security and a well-paying job to strike out on my own my wife was shocked and incredulous yet I was alert to other opportunities too when I heard about an incredible thing that was happening with my multimixer out in California I kept getting these calls and the message was always the same I want one of those

mixers of yours like the McDonald Brothers have out in California I got curious who were the McDonald brothers and why were customers picking up on the multimixer from them when I had similar machines in lots of other places so I did some checking and was astonished to learn that the McDonald's had not one multimixer not two or three but eight the mental picture of eight multimixer turning out 40 shakes at one time was just too much to be believed so I flew out to California to check for myself something was definitely happening here the cars began to arrive and lines started to form soon the parking lot was full and people were marching up to the window and back to their cars with bags full of hamburgers eight multimixer turning away at one time began to seem a lot less far-fetched in light of this steady procession of customers I went over and introduced myself to Mac and Dick McDonald they were delighted to see me

Mr multimixer they called me and I warmed up to them immediately we made a date to get together for dinner that evening so they could tell me all about their operation I was fascinated by the Simplicity and effectiveness of the system they described that night each step in producing The Limited menu was stripped down to its Essence and accomplished with a minimum of effort that night in my motel room I did a lot of heavy thinking about what I've seen that day visions of McDonald's restaurants all over the country paraded through my brain in each store of course there would be eight multimixer woring away and padding a steady flow of cash into my pockets the next morning I got up with a plan of action in mind I got together with mac and Dick McDonald again I've been in the kitchens of a lot of restaurants and Drive-ins selling multimix around the country and I have never seen anything to equal the

potential of this place of yours why don't you open a series of restaurants like this it would be a gold mine for you and for me too because everyone would boost my multimixer sales what do you say silence then Mac McDonald said we don't need any more problems we're in a position to enjoy life now and that's just what we intend to do his approach was utterly foreign to my thinking so it took me a few minutes to reorganize my arguments but it soon became apparent that further discussion would be futile so I said that they could have their cake and eat it too by getting somebody else to open the restaurants for them then dick McDonald asked who could we get to open them for us I leaned forward and said well what about me when I flew back to Chicago that faithful day in 1954 I had a freshly signed contract with the McDonald Brothers in my briefcase I was a battle scarred veteran of the business Wars but I was still

eager to go into action I was 52 years old I had diabetes and arthritis I had lost my gallbladder and most of my thyroid gland in earlier campaigns but I was convinced that the best was ahead of me that was an excert from the book I'm going to talk to you about today which is grinding it out the making of McDonald's which is the autobiography of Ray Croc so something that you and I have discussed before is this idea that the order that you read things in actually affects your interpretation of them and the reason the first time I read this book it's been like six years since I read it I think it was like episode seven of Founders and back then I didn't know what I didn't know and so the past few weeks I I noticed this really interesting pattern that has popped up over and over again and it's the fact that it's not what you do but how you do it and there's some examples that jump out at you on the last few episodes of

Founders like episode 288 with Ralph Lauren the fact that he got wealthy he almost went bankrupt when he was a manufacturer and and then he became one of the wealthiest people in the world when he switched from licensing instead of manufacturing the early days on episode 290 the early days of Microsoft and Bill Gates the fact that he would refus to sell his software for a fixed price and instead get paid for every copy and perpetuity but when he was buying other people's software he'd always give them a fixed price and not let them get paid per copy then last week on episode 292 the invisible billionaire Daniel lwig realizes in his early career hey I can make 4X as much just switching from transporting Lumber to oil and so this idea that that it's not what you do but how you do it has been coming up in conversations with other Founders and then I realized oh wait Ray Croc is actually a perfect

example of this I should go back and reread his autobiography because he made more money than other fast food chains by altering his business model where he'd actually own the real estate and un leas it back to the franchisee and that alteration of his business model actually produced similar wealth effects like uh like Ral Lauren changing for manufacturing to licensing going from almost being bankrupt in Ray cr's case he could hardly pay his bills when he was just getting 1.9% of the sales of all the franchises to becoming unbelievably wealthy to when his wife actually dies a few years after he is they wind up donating I think 1.5 close to $2 billion to charity and so I'll go into a lot more detail about that in the middle of the book I do want to pull out two stories from his early life that I think are important and then we'll get into his early career uh we're going to see a huge bias for Action uh even from

a very young age he was trying to start his own businesses and make a lot of money they call me Danny dreamer a lot even later when I was in high school and would come home all excited about some scheme that I thought up I never considered my dreams wasted energy they were invariably linked to some form of action 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 I worked at something whenever possible there's an old saying that all work and no play makes Jack a Dull Boy I never believe that because for me work was play and that last sentence is really important because that all consuming work ethic that he has as a young man he maintains throughout his entire life I'll go over there's multiple highlights that I have where it's just like you won't believe his insane schedule he makes it very clear in his autobiography that work was

his number one priority throughout his entire life and he makes no apologies for that even though it destroys a lot of his personal relationships and one more thing from his early life is when he drops out of high school because he wants to serve in World War I the United States had entered World War I and the war effort was very important everyone was singing over there and that's where I wanted to be my parents objected strenuously but I finally talked them into letting me join up as a Red Cross ambulance driver I had to lie about my age in my company was another this is this is crazy I'd remember this from the first this is one of the paragraphs that jumped out that I still remember from the first time I read this book six years ago in my company was another fellow who had lied about his age to get in he was regarded as a strange duck because whenever we had time off and went out on the town to chase girls he

stayed in his Camp drawing pictures his name was Walt Disney and so the war ends he refuses to go back to school and he starts his career as a Salesman and this is what he mentioned earlier that he's going to sell that he's sold paper cups for 17 years and this is the first indication that we get that he's going to maintain an insane schedule throughout his career it wasn't easy I pounded the pavement in my territory from early morning until 500 or 5:30 in the afternoon I would have worked longer I suppose but I had another job waiting for me at 6:00 playing the piano at a radio station I had to arrive at the station at 6:00 p.m. and then play for 2 hours I then had a 2hour break from 8:00 to 10 p.m. and then I returned to work until 2:00 in the morning a few hours later at 7:00 a.m. I'd be off with with my sample case in pursuit of paper cup orders the only break in this routine was on Sunday which was my day off from

selling paper cups but we had afternoon hours at the radio station so he just told you he's working from essentially 700 in the morning till 2: in the morning with a 2our break from 8:00 to 10: p.m. and he's maintaining that schedule for almost 7 days a week and he's married at this time I think he got married when he's like 18 or 19 as you can imagine his wife is not going to be happy about this they actually married for 35 years and his decision to go all into McDonald's actually causes them to get divorced and so it says Ethel used to complain about the amount of time I spent away from home working looking back on it now I guess it was kind of unfair but 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 and so Ray starts the book saying hey every person is responsible for their own opportunity and when you see an opportunity you got

to chase it the problem with the cup business is it's really slow he's selling it in Chicago in the winters and so he's like I don't make enough money during the winter I got to find another job during that period and and in the newspaper he says I had been reading about the business boom down in Florida newspapers compared the rush down there to the Gold Rush of 1849 this is in the mid1 1920s right before the Great Depression there's this huge speculative real estate boom uh that's happening in Florida and so he's worried that everybody's going to get rich and he's not he convinces his bosses at the paper cup company to let him work down there during the winter and he'll come back for the busy season so he goes down and he says I got a job selling real estate everything I'd been hearing about the real estate boom was true and so he's a young kid he's in his early 20s and he's trying to figure out okay where can I

get customers like where do I have an edge here and so he does something clever here he says I went to the Miami Chamber of Commerce and I looked up the names of tourists who came from the Chicago area where Ry was living and grew up I'd call them and fill them in as one Chicago in to another on an exciting development that I found in this land of crazy speculation and his strategy worked really well the problem was his timing was bad just when I was getting into the swing of selling these Lots the whole business vanished and so now he doesn't have a product to sell but he still has his piano playing skills so he's going to get a job and this job is going to lead him to go to jail so he becomes a piano player at this nightclub on Palm Island called The Silent Night this is happening in Miami today Palm Island is still there but now it is a really nice Enclave of single family homes and so Ray loves this new

job cuz he's making a ton of money Su I was averaging $110 a week that was really good money in those days why is he making so much money because the place is illegal and he's working for a bunch of gangsters the place itself was fabulous gorgeous glamorous and illegal the owner was a Rum Runner who bought the elicit boo he served from the Bahamas a doorman was posted at the entrance gate to screen guests as they arrived before opening the gate the doorman would push one of two buttons one would ring a bell that would bring the Mater D bustling out to meet the patrons the other button would sound an alarm that meant Revenue agents and those are the agents that are enforcing prohibition which is currently uh the law of the land at this point in history the doorman would delay the fedal agents as long as he could by by the time they got inside there was no evidence of liquor in the place and so this goes on

for a while Ray is static until he gets popped one night the revenue agents out maneuvered the Palm Island Security man and we all wound up in jail I was mortified and so he winds up getting out of jail and heading back to Chicago he says I had left Florida in the nick of time the club closed its gates for good Palm Island popped up into the news once in a while as time went by because Al Capone built a home there and so when he gets back to Chicago he does something smart he says okay no more multitasking I'm all in on one thing and one thing only only I'm going to pick the best opportunity and go all in on that when I returned to Chicago I started selling paper cups again I vowed that this was going to be my only job I was going to make my living at it and to hell with Moonlighting of any kind I intended to devote every ounce of my energy to selling and that's exactly what I did and so when I got to that part the note

I jotted down uh for myself is actually this quote that I keep on the home screen of my phone and it's a quote from the Michael Jordan documentary The Last Dance describing Michael Jordan and it says a guy that was to focused on one thing and one thing only and so at this point in his life he has to deal with a devastating tragedy and that's the early death of his father he was just explaining this huge speculative real estate bubble that was happening right before the depression and as I reread this highlight several times what popped to my mind is that quote that I tell you over and over again that comes from episode 242 which is the biography of Francis for Copa and it says you can always understand the son by the story of his father the story of the fathers embedded in the son Ry even Ray say like he had this Psychopathic drive to have cial success and even though he achieved great wealth later in life even after he

had that wealth he still had that Psychopathic drive to keep doing more and once you understand how his dad's life ended I think that makes more and more sense and so Ray's dad got a job that he doesn't really like wants to make more money he's not making enough money so he's like hey I'm going to I'm he essentially began speculating in real estate and so at a time where if you make a hundred or a couple hundred bucks a week that you're doing fantastic his dad is like buying Lots or houses for 6,000 and then selling it a short time uh for 8 18,000 and so in a story that's oldest time he confuses luck with skill and holds on way too long and gets caught up in the but the bursting of this this huge speculative bubble father seemed to have a mest touch when it came to picking property he was so busy pyramiding his land holding so throwing more money into it though he' somehow failed to see whatever warnings there

might have been of the impending crash when the market collapsed he was crushed beneath a pile of Deeds he could not sell the land was worth less than he owned this was an unbearable situation for a man of my father's principled conservatism he died of a cerebral hemorrhage in 1930 he had worried himself to death on his death the day he died were two pieces of paper his last paycheck and a garnishment notice for the entire amount of his wages and so as I mentioned earlier Ray is going to sell paper cups for 17 years one of his customers this guy named Earl Prince is actually going to invent the multimixer so Ray's going to jump from selling paper cups to selling the multimixer as we already know the multimixer is what leads Ray to the greatest opportunity of his life so he says he we're still the multimixer I want to go over just that he he talks a lot about his first marriage and I think

in describing the the relationship dynamic between him and his wife we actually understand a lot about who he was as a person and so he says the multimixer was the invention that really made big volume milkshake production possible and it changed the course of my life so he mentioned earlier that the reason he made a good deal of money from selling paper cups with the introduction of prohibition there was this huge boom in America at the time for these soda and milkshake fountains you'd see like stores would pop up everywhere they'd be in like inside of Walgreens and so this huge explosion in that industry actually helped him because they needed the paper cups that he was selling and so his customer goes to him and says hey why don't you leave Lily tulip that's the paper cup uh company that he's working for and just go we'll go into business together I will make uh and manufacture the multimixer and you can sell them and

then we'd split the profits and so Ray is super excited about this business opportunity he believes in it but when he tells his wife she thinks he's crazy Etho was incredulous at the idea that I would give up my position and go off on a flyer like this you are risking your whole future if you do this you are 35 years old and you're going to start all over again as if you were 20 what if the multimixer turns out to just be a fad and fails you have to trust my instincts on this I said I'm positive that this is going to be a winner I want you to help me come down and work in the office for me and together we will make it a terrific business I will do no such thing she said but Etho I need your help she absolutely refused to help I felt betrayed that was when I began to understand the meaning of the word estrangement it is a terrible feeling and once it appears it grows like dry rot Ethel did not deter me though when I

have my mind made up about a business deal that's it that's not the last time they're going to fight about raise ambition over and over again he does do some crazy stuff when he just said hey you know if I have my mind made about about a business deal that's it uh he puts his money where his mouth is he he'll mortgage his home to go and raise the money needed for his business we'll get there in a minute I do want to bring up one thing though he brings in the multimixer contract to his actual employer because originally he's like hey maybe we can sell this together they don't have an interest in it so when he tells his boss hey I'm going to strike it on my own I'm going to go into business with Earl they won't let him because they have the contract the actual multimixer contract is with his company but he's their best salesman so he's like if you don't let me do this I'm going to quit anyways and so they

work out a deal that's winds up being a terrible deal and so this bad deal actually leads Ray to mortgaging his house to buy out his partner but we're not there yet says what we worked out was a deal in which I got the multimixer contract and the company got 60% of my new company it was a satanic setup but I didn't see that then and so he sets up this new company to sell the multimixer he calls himself a oneman band and he just starts hitting the streets I was having a lot of fun back in 1938 when I struck off on my own I was a oneman band and I traveled all over the country sales were not bad considering the newness of the product but I was extremely unhappy with my financial setup I determined after a little more than 2 years that I was going to have to get that that 60% back somehow and so he keeps pushing the point he's like what's your buyout number what's your buyout number he's going to do the same thing

for the McDonald's brothers that's why I'm reading this section to you and keep in mind the company gave him $6,000 of startup Capital he's doing all the work two years later this is what they tell him I don't know how he kept from choking on his own b as he mouthed the figure $68,000 and so Ra's disgusted by the situation but he wants out I didn't know where the hell I was going to raise that money but I had made up my mind to do it in the end most of the cash came from my new home I managed to get an increase in the mortgage much to El's dismay I don't think she ever got over the shock of discovering that we were $100,000 in debt and it's during this period of his life that he first mentions why the book is titled grinding it out for me this was the first phase of grinding it out building my personal Monument to capitalism I paid tribute in the feudal sense for many years before I was able to rise with McDonald's on the

foundation I had laid without the adversity I might not have been able to person evere later I learned then how to keep problems from crushing me I refused to worry about more than one thing at a time and when I and I would not let useless fretting about a problem no matter how important keep me from sleeping I knew that if I didn't sleep well I would not be bright and fresh and able to deal with customers in the morning and so think about how crazy this is he sold paper cups for 17 years he starts selling the multimixer in 1938 now this is in the early 1950 and he realized uhoh I'm in a dwindling business and he knows this because he spends his time traveling around talking to his customers so his customers are restaurants drug stores soda fountains and little by little they're either downsizing or eliminating selling milkshakes or sodas completely and so he has a fewe window to be like okay well

I'm going to either be in a decreasing business or I have to find something else and this is the the punch line the upshot of all this I knew that I had to find a new product at this point he'd been selling a multimixer for 15 years it was not long after that that I became intrigued by the the stories of McDonald brothers and their operation that keep that kept eight multimixer woring up what the hell I thought I'll go see for myself so I book my 52-year-old bones onto the rede special and flew West to meet my future and so one of the most important decisions that the McDonald Brothers uh made early on is that they they made every detail perfect and then they limit the number of details they had to perfect this is something you can see that the present Corporation totally got away from but I thought this description was good it was a restaurant stripped down to the minimum in service and menu the prototype for Legions of

fast forward fast food units that would later spread across the country the Simplicity of the procedures allowed the McDonald's to concentrate on quality in every step and that was the trick make every detail perfect and limit the number of details to perfect and so from the very beginning Ry makes two crucial mistakes one he acts as his own attorney and two he accepts just a terrible deal this is again he's known for like accepting these bad uh Financial deals at the beginning and then try to figure out a way to wiggle himself out later but there's one specific clause in the contract that is going to cause the disintegration of the partnership between the McDonald brothers and Ray Croc later on and he says I was for the contractual Clauses that obligated me to follow their plans down to the Last Detail too even to signs and menus but I should have been more cautious there the agreement was that I could not deviate

from their plans in my units unless the changes were spelled out in writing and then signed by both brothers and sent to me by registered mail this is never going to happen by the way this seemingly anoculus requirement created massive problems for me a man there he says there's an old saying that a man who represents himself as a fool for a lawyer and that certainly applied to me in this instant I was just Carried Away by the thought of McDonald's drive-in's proliferating like rabbits also I was swayed by the affable openness of the McDonald's brothers and so he says the meeting was extremely cordial I trusted them from the outset and then he goes into what he agreed on financial terms and again this makes sense I'm not CRI izing him here when he says Hey the agreement gave me 1.9% of gross sales from franchises so he gets that that's his whole thing I'm going to make 1.9% he's got to kick up half of a percent to

the McDonald's brothers so really he gets 1.4% they're selling hamburgers for 15 cents and So eventually he hires this guy Harry to work with him they really they're more like partners and Harry's like hey you don't build an Empire off of 1.4% of a 15 cent hamburger but now that I've read this over and over again I realized I oh well keep in mind at this point he's signing this he's not thinking he's going to make a ton of money by building this huge franchise system that McDonald's becomes right he's like oh I'm just going to create more demand for the multimixer if I can set up a bunch of McDonald's stores all over the country all of them will have to buy eight multimixer from me that's an important point he does not realize this the sear scope there's no way he could right like McDonald's becomes one of the largest companies that ever existed but he does not realize the size and scope of the opportunities right in

front of him yet we'll get there in a minute the brothers were to get half of a perent out of my 1.9% I just told you that if they had played their card right that half a percent would they would have made them unbelievably wealthy I'll get into more details of how he buys them out on that later as well but this part is important because it explains this mindset I kind of just gave you a summary of that a minute ago I've often been asked why I didn't simply copy the McDonald Brothers plan they showed me the whole thing and it would have been easy matter to Pat in a restaurant after theirs the idea never crossed my mind I saw it Through The Eyes of a Salesman here was a complete package and I could get out and talk up a storm about it remember I was thinking more about perspective multimixer sales than hamburgers at that point and then he also mentions the fact that he liked the name this is something he repeats over

and over again I think product names company names are actually really important I think other people discount that there was uh there was also the name I had a strong intuitive sense that the name McDonald's was exactly right I couldn't have taken the name meaning if he did it on his own he couldn't have taken their name and so the fact that Ray goes all in on McDonald's is what kills his marriage Ethel was insens by the whole thing we had no obligations that would jeopardize that we would be jeopardized by it our daughter Marilyn was married and no longer dependent on us but that didn't matter to Ethel she just did did not want to hear about McDonald's it closed the door between us I had no time to bother with emotional stress I had to find a site for my first McDonald's store and start building and you're going to see this guy's a little nuts when it comes to the women in his life he's going to be mult married

multiple times in the book and just the way he jumps into these things I'll tell you more about that in a minute so from the very first time he violates this order uh this Clause that they have in the contract that hey if you're going to make any changes you have to notify Us in writing we have to sign that it's okay and then we have to mail it back to you and for some weird reason they would agree over the phone but they would never actually put it in writing so this causes him he's going to wind up being default in default right from the very beginning and again this is partially Ray's fault he jumped into business he's in a partnership with people he doesn't really know I called the McDonald boys and told them about my problem well you need a basement they said so build one I reminded them that i' H that I had to have it documented by a registered letter they poo pooed it and said it was

all right and go ahead I went ahead with the building telling myself that when I got breathing space I'd fly out to see the McDonald's uh McDonald's brothers and get the all the contractual uh details wrinkled out once more or ironed out once more excuse me that would have worked had the McDonald's been reasonable men instead they were obtuse they were utterly indifferent to the fact that I was putting every cent I had and all I could borrow into this project when we sat down with our lawyers and attendance the brothers acknowledge the problems but refused to write a single letter that would permit me to make changes and so Ray and the McDonald's brothers would have weird interactions like this uh we have told you by telephone that you may go ahead and alter the plans as we discuss said their attorney but the contract calls for a registered letter if Mr Croc does not have one he's put in Jeopardy said my

attorney that's your problem the response would be it was almost as though they were hoping had failed this was a peculiar attitude for them to take because the more successful the franchising the more money they would make and so Ray has no choice but to go ahead and open his first McDonald's store keep in mind he is still working full-time selling multimixer at the same time that he's developing the first store so this is again another example of this this crazy schedule that he would me maintain he was doing this when he was 17 now he's still doing this in his 50s I would drive down to the the plain's location each morning and help get the place ready to open the janitor would arrive at the same time that I did and if there was nothing else to be done I'd help him I'd never been too proud to grab a mop and clean up the restrooms even if I happen to be wearing a good suit so the reason I read that sentence

to you he repeats this over and over again in the book like he's like a neat freak he would explode if the bathroom was dirty or if there's like litter in the parking lot uh so he says uh but usually there were a lot of details to be taken care of in Terms of ordering supplies and keeping the Fe food operation going so I'd write out detailed instructions for Ed Ed's the guy that he hired uh to run this for store uh Ed came in at about 10:00 in the morning and then uh he'd open the store at 11:00 I would leave my car at the store walk a few blocks to the train and then take the train to Chicago and be in my office before 9:00 this is where he's selling multi mixers shows up to McDonald's early before they open helps it get set up then goes selling multimers all day when he's done with that in the evening he goes back to McDonald's in the evenings I would commute back and walk over to the store

I was always eager to see it come into view my McDonald's exclamation point he's super happy about this but sometimes the site pleased me a lot less than other times sometimes Ed would have forgotten to turn the sign on when dust began to fall and that made me Furious or maybe he he brings up the the litter again or maybe the lot would have some litter on it that Ed said he hadn't had time to pick up those little things didn't seem to bother some people but they were gross affronts to me I'd get screaming mad and really let Ed have it but Perfection is very difficult to achieve and Perfection was what I wanted in McDonald's everything else was secondary and I think it's actually important to pause there and I think one of the most important parts of this autobiography is that Ry is not trying to get you to like him in fact I would argue if you read this book and you get to the end of it you're not going to say

hey Ray sounds like this great guy I'd like to be friends with him I think it's much more likely to get to the end of the book and be like oh wow this guy is driven persistent ruthless and willing to destroy anybody that get gets in his way this is a very old book it was published in 1977 they just ma they they made a movie about the book where Michael Keaton plays Ray Croc you can watch it on Netflix it's called founder and there's a line in that movie that I think is demonstrating the point I'm trying to make to you where he says hey if my competitor was drowning I'd put a hose in his mouth he does not hide that sight of him he just referenced like even leaving a little piece of the trash and I'm going to explode I'm going to get in your face I'm going to yell and his justification is that hey perfection is very difficult to achieve but Perfection is what I wanted in McDonald's and everything else was

secondary to me and so this is the part where the most important person in the McDonald's story not named Ray Croc appears and this is this guy named Harry sborn and Ray admits without Harry's idea McDonald's would have never grown into the company that it grew into and so I'm going to tell you the way that Ray describes Harry's idea and I'm actually going to read you the summary of Harry's idea from the movie which I think is absolutely fantastic and it says this is the move that made possible McDonald's dramatic growth it started our Evolution as a company whose business was developing restaurants and selling franchises to operate them our aim was to ensure repeat business based on the systems reputation rather than on the quality of a single store operator this would require a continuing program of educating and it's this is going to sound like uh basic to us now because this is the what like the world we live

in now where there's a ton of franchises for everything but this world did not exist at the time they're building McDonald's this would require a continuing program of educating and assisting operators and a constant review of their performance it would also require a full-time program of research and development I knew in my bones that the key to uniform uniformity would be in our ability to provide techniques of preparation that operators would would accept because they were Superior to methods they could dream up for themselves but research and development and staff to supervise and service operators effectively takes money that's a big problem because what is he getting now it takes more than 1.4% of a 15 cent hamburger some fries and Shakes the only practical way for McDonald's to grow as we envision would be for us to develop the restaurants ourselves we could plan a strong system in which locations could be developed by

McDonald's as P of part of an overall long range Nationwide marketing program it would make the right to operate a McDonald's restaurant far more valuable to a potential operator than if we were franchising only a name actually getting into the restaurant development business was a seemingly insurmountable problem Harry's solution the formation of franchise realy Corporation was to my mind a stroke of financing genius when Harry came up with a way to make it possible I backed it by going into Hawk for everything I had my house my car you name it and this part is exactly why I wanted to read this book right now in the sequence that I'm reading it in given what I told you about Ralph Lauren Bill Gates and Daniel lwig at the beginning it is not what you do it's how you do it let me go to Harry's fantastic summary of this idea that appears in the movie and he's talking in the movie he's talking to Ray he says You Don't See to

realize what business you're in you're not in the burger business you're in the real estate business you don't build an Empire off of a 1.4% cut of a 15c hamburger you build it by owning the land upon which that burger is cooked what you ought to be doing is buying up plots of land then turning around and leasing those lots to franchisees Who as a condition of their deal are permitted to lease from you and you alone this will provide you with two things two things that at this point in McDonald's history Ray Croc does not have number one a steady upfront Revenue stream money flows in before the first stake is in the ground and number two greater capital for expansion which in turn fuels further land acquisition which in turn fuels further expansion that that right there is how they go at this point they have maybe a few dozen McDonald's to by the time the book ends in 1977 to 4,000 to today

40,000 this changes everything because now they have access to Capital before Ray's trying to get uh loans for expansion they're like okay well what do you own well I own the contract that lets me build franchises and they're like what do you got for that like 1.4% and so Bank after bank and lender after lender are like uh no no no thank you but by owning the real estate and then leasing it back opens up these giant pools of capital first they start off doing like regular mortgages and then then Harry's like oh wait we got to argue they start targeting uh life insurance companies and there's a line in the book on that it says we're doing fine with these Bank mortgages Harry said but if we're going to but we're going to have to get some big institutional investors to back us Harry went after life insurance companies and so if you look back at Ray's life up until this point it's fascinating you

know how Steve Jobs said you can't you can't connect connect the dots looking forward it only Mak sense looking backwards let me actually pull a full quote because I think repeating it from time to time is actually valuable uh I think Steve said this at his commencement address but he says you can't connect the dots looking forward you can only connect them looking backwards so you have to trust that the dots will somehow connect in your future you have to trust in something your gut Destiny Life Karma whatever this approach has never let me down and it has made all the difference in my life so Ray goes from selling paper cups which leads him to selling multimers which then leads him to discovering McDonald's Brothers which then leads him to setting up more McDonald's stores so he can sell more multimixer which then leads him to meeting Harry sborn and Harry leads him to the true business

Innovation that is going to be responsible for all of Ray Croc's wealth there's no way you're connecting those dots looking forward and so in addition to his financial genius I think having somebody that truly believes in the opportunity that you're pursuing the same way you do is very valuable we see Harry thinks about this opportunity the the size of the opportunity just like Ray does I recall that Harry made a trip to San Bernardino that's where the very first McDonald's was where the McDonald Brothers lived uh made a trip to San Bernardino about the time where we were really starting to roll and Dick McDonald asked him what he thought of the future what the future of McDonald's would be Harry told him that one day this company would be bigger than FW Woolworth so that's not going to make that's going to mean nothing to most people but if you read stories about the early American retail industry FW

Woolworth was a gigantic company it was one of the most successful American uh retail companies started in the late 1800s and got gigantic in the middle of the uh middle 1900s and so with that background you're going to see dick McDonald's response is going to make a lot more sense so let me read this to you again uh when we were really starting to roll dick McDonald asked Harry what he thought about the future or what the future of McDonald's would be Harry told him that one day this company would be bigger than FW WTH dick really did a double take at that he told me later I thought you had a genuine nut on your hands Ray but Harry knew exactly where he wanted to go and he knew how to get there and so at the beginning of well they have a tiny tiny team at headquarters and so Ray is going to ask for an unbelievable amount of sacrifice I'm just going to tell you what I wrote before I read this to you missing your

kids birthdays to sell 15 C hamburgers is whack but again Ry does not hide who he is unfortunately he convinced other people to make the same sacrifices and I'll tell you why that's so tragic in one second I felt deeply indebted to Harry and June June I think was the first employee of the McDonald's corporation what's going to turn into McDonald's Corporation she she's actually when they go public the first woman ever allowed on uh I think it's the NASDAQ or the New York Stock Exchange um so it says they work tirelessly I knew that both of them were neg neglecting their family obligations completely so that they could stay on top of things and a rapidly building operation June later told me that all the while her two boys were growing up she never made it to one of their birthday parties or graduation ceremonies how do you think her kids feel about that and when I tell you in one second how do you think if June was

alive we could talk to her how she felt about it I'll get her in one second I was in the same boat it was a little easier for me perhaps because of my continuing cold war between Ethel and my daughter and me so again he's saying I got relationships with my daughter and relationships with my wife my total commitment to business had long since been established in my home I gave them stock 10% to June and 20% to Harry and ultimately it would make them rich now why did I ask you how how her kids feel about it you know how her kids feel about it how does June feel about it a few years from now Harry and Ry are going to have a falling out Ry is going to kick Harry out of the company and they wind up not talking for almost a decade and shortly after that he said he made June retire because she was part of the Old Guard and she wasn't with the new way they were doing things that's another way of saying he fired her yeah

she got to keep her stock she was still rich but this person saying hey miss your kids birthdays every single one of your two boys when you're growing up miss them for me is the same person a decade from now that is going to fire you missing your kid's birthday to sell 15 cent hamburgers is whack you got work to do that's fine wake up earlier when your kids are still sleeping work after they're sleeping if you have to but don't miss their birthday party and so something also that he mentions in the book is how different people treat you at the very beginning he starts trying to sell these franchises uh you know he's 52 54 years old and he's a member of a country club and people are like kind of laughing at him they're like they thought he was nuts like why are you going and trying to sell hamburgers and then once they start seeing that McDonald is going to turn into like this massive success and the

growth happen so fast they're like oh McDonald's like this overnight success and he's got an interesting response to that and he says people marveled at the fact that I didn't start McDonald's until I was 52 years old and then I became a success overnight but I was just like a lot of Show Business personalities who work away quietly at their craft for years and then suddenly they get the right break and make it big I was an overnight success all right but 30 years is a long long night so some of their franchises are absolutely fantastic some are con artists one con artist causes them uh to lose about $400,000 and that taking that negative they actually like realized oh wait we have to protect our down downside here so they actually do something really interesting and something that Ry was previously against and so they decide one way to protect their downside is actually by owning a group of stores

themselves and so up until this point Ray was adamant about not selling stock but he did want to protect his downside so it says in the course of our loan discussions the idea emerged that we should build and operate 10 or so stores as a company if worst came to worst we could always retrench and operate our company stores under some other name remember at this time he still partners with M McDonald's brothers so if he's saying if they enforce like this default the contract well we own these stores this is a separate company we could just start new under different names so that's what he's talking about there and so a bunch of these uh insurance companies are willing to lend him money to do this in exchange for they want 20% they want 22% of our stock uh in exchange for $1 1.5 million I fought with the idea of giving up any part of the stock in the company I had struggled so desperately to build yet the appeal

of $1.5 million was irresistible this is in 1959 so it says they they wind up doing this deal the three insurance companies make a ton of money on this it says they sold their their stock a few years later for between $7 and $10 million so they turned 1.5 into 7 to 10 million however if they waited until 1973 to sell so what's that like 14 years in the future they would have gotten over $500 million for it and it's a good thing he did this because the fights with the McDonald's Brothers continue this time they're fighting over advertising the McDonald brothers were simply not on my wavelength at all I was obsessed with the idea of making McDonald's the biggest and best they were content with what they had they didn't want to be bothered with more risks and more demands we asked them to contribute 1% of their growth their grow sales towards an advertising campaign that would benefit our stores

and all of them as well but they would have nothing to do it do with it all I could do for the time being was to live with it and so this is something that Ray's going to repeat us several times throughout the book he's like he has an intense belief in advertising because he saw how effective was uh for the early growth in McDonald's in our business there are two kinds of attitudes toward advertising in public relations one is the outl Outlook of the begrudge who treats every cent paid for an ad program as if they were strictly expenditures my own viewpoint is that the is that of the promoter I never hesitate to spend money in this area because I see it coming back to me with interest so they saw it as another expense he saw it as an investment so I mentioned earlier that this guy when it comes to like his love life is a little nuts he's still married uh to Ethel they're estranged but they're still technically together he's

going to try to steal this guy's wife and the white they're it's a husband and wife that actually are one of the franchisees and so because of the fact that they're running one of the stores he winds up talking her name's Joanie he winds up talking to Joanie on the phone all the time and then he just decides hey like he's trying to convince her hey leave your husband and he's like oh I guess I have to get divorced first he this guy's nuts uh so he says uh this led to Long telephone conversations between Janie and me I would be tingling with pleasure from head to toe when I hung up the receiver feeling this way made it impossible for me to go on living with eel I moved out of our home the next step was to propose to Joanie that we both get divorced and marry she says no but this goes like he's going to wind up this what I mean about this guy's nuts he winds up prevent he's like okay I guess I got a divorce first so he

gets divorced Joanie says no then he's going to marry somebody else for like five or six years then he has another shot of Jonie so he divorces that lady too this is wild and again in his divorce settlement with Ethel we see what he really believes in so I bought my freedom from Ethel she wind up getting everything I had except my McDonald's stock so the tension between him and the McDonald's Brothers keeps growing until he's just like okay just name your price I need to get the hell out of this contract how do we do it very similar to when he needed to get out of the contract for $68,000 uh when he was selling multi mixers I called Dick McDonald and asked him to name their price he did and I dropped the phone my teeth and everything else he asked me what that noise was and I told him that was me jumping out of the 20th floor of the office they were asking for $2.7 million needless to say Ray does not

have $2.7 million at this point in his career this was going to really take some Financial wheeling and dealing so they wind up getting in touch with this guy he's actually a financial adviser to Princeton University Howard University Carnegie Tech the Ford Foundation and about 12 uh 12 educational and charitable uh institutions in total these 12 charitable uh and education institutions are going to lend him the $2.7 million they call these guys the 12 apostles and in return for the $2.7 million the cash that they get to buy out the McDonald's Brothers the 12 apostles want the McDonald's Brothers what they were getting the half a percent of gross sales of all McDonald's stores and the reason I'm reading this to you is because it's just crazy when you have a business that's working how much value creation can happen you know in 5 10 15 years it was an extremely successful deal the 12 apostles wind up

making $12 million on it okay so they do 2.7 million 2.7 million in they get 12 out but here's where it gets real crazy remember that we had been forking over half a percent to the McDonald Brothers All Along anyhow the total cost of this transaction to us was about $14 million and it was peanuts compared to what the corporation earned in the years that followed by retaining that 5% instead of paying it to Mac and Dick McDonald on today's systemwide sales which is is in 1977 on today's systemwide sales of more than $3 billion that half a percent would be 15 million a year and so you and I have talked about before the fact that if you understand why you have to understand why somebody's doing something and if you understand why they're doing it their actions will make a lot more sense to you I always use a reference of the fact if you go and study Johny rockefeller's career he literally believed that he felt

money-making was a god-given talent and that he had to make as much money as possible so therefore he could give away as much money as possible and so viewed through that lens of his belief it makes sense about why he made the decisions he made in his career Ray is a very extreme dude he's not hiding it and the reason being is because he views McDonald's as his religion he uses the word faith he says I have a whole album of mental snapshots from this time period turning through them brings back a rush of memories not Nostalgia but reaffirmation of my faith in McDonald's I speak of faith in McDonald's as if it were a religion that is exactly the way I think about it I I've often said that I believe in God family and McDonald's and in the office the order is reversed that makes sense so now when you're like hey dude why are you getting this guy's face there's like a little piece of trash on

the ground are you're throwing in your office are you're banging on the tables are you're kicking out partners are you're firing people have been with you for 25 years it is a religion to him and if he feels you're getting in the way for the constant growth and expansion of that religion he will view you as a problem and stop at nothing at solving that problem and it's because he has this religious Zeal for McDonald's just like when uh when Harry was talking to Dick McDonald he's like oh I think we'll be bigger than FW war war it's like this guy's a nut there's examples in the book where Ray says the same thing he's sitting there talking to me he's like Hey listen one of these days we're going to be a billion dooll company the person he's talking to fro they're having lunch froze was frozen by that statement and stopped in mid bite and looked at me with a funny popey expression and that religious Zeal he

never lost it like there's a line in the afterward that's written after raid Ray dies uh like seven or eight years after the book is published and it says even in the last few years when he was confined to a wheelchair he still went to the office every day and So eventually he moves out from Chicago to California he feels California is going to be more valuable the most valuable state for McDonald's almost more than any other all the other states combined at this point but he's displeased with how slow the growth is so this again goes back to his belief in investing in advertising as we solved our supply problems in California and built more stores business gradually picked up but it remained far lower than it should have been so this guy named Nick that is working for him came to me with a proposal for a television advertising campaign the uh the project uh was going to cost $180,000 and he wanted to pay

for it by raising the price of hamburgers a penny this is a terrific plan I said but we're not going to raise the price it demonstrated precisely how an ad campaign would repay its cost many times over while failing to spend the money would cost us much more in the long run so again he's echoing back to this argument that he was having with his former uh partner dick McDonald dick is no longer in the picture anymore so if Ray says we're going to spend advertising money they're going to spend advertising money this is the result it turned Californians into our parking lots as though blindfolds had been removed from their eyes and so business is booming they're expanding everywhere and he is miserable and this is what I mentioned earlier when it comes to his love life this guy is a little nuts all this progress was very rewarding I should have been elated so he's talking about he's making a ton of money he's

got this beautiful house on the hill in California fr is dotting all across the country and yet he says I should have been happy but the undeniable fact was that I was miserable I had forced Joanie out of my mind after she said she wasn't going to leave her husband but I could not get her out of my heart some people are Bachelors by Nature I am not I guess I need to be married to Feel Complete that is why I fell so hard for Jane this is going to be wife number two Joan's goingon to be wife number three her name was Jane Dobbins green she was John Wayne secretary a mutual friend introduced us this is what I mean about this guy's little nuts we had dinner together the night after we met and the next night and the night after that we had dinner together five nights in a row I was enchanted within two weeks we were married Joanie found out about it eventually one day I got a telephone call from her and we had a brief

business-like conversation uh she ended the conversation by asking Ray are you happy I was shaken and astonished it took me a moment to catch my voice then I blurted yes and Slamm down the receiver so a number of times throughout the book Harry and Ray are having these fights over this philosophical difference on how to run the company that series of fights is going to wind up leading to their final confrontation remember to Ray McDonald's is a religion and if you're trying to get him to slow down the spreading of that religion you are then deemed his enemy we're going to get there in a minute but one thing Ray believed in was that they should have a decentralized management structure Harry did not Harry didn't quite see things my way in these matters he wanted tighter corporate controls a more authoritarian posture I maintained this is a good line 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 sit on them and they will be stifled the best ones go elsewhere I knew that very well from my past experience I believe that less is more in the case of corporate management and then he explains what caused the end of their partnership it's lonely on top I've never felt this so keenly as when Harry and I had our final confrontation and he resigned the most important problem I had with Harry was his growing conservatism in real estate development he was listening to Bankers who told him that the country was heading into a recession in 1967 and then McDonald's ought to conserve cash and hold down its construction of new stores Ray is all gas and no breaks there's no way that he's going to slow down construction of new stores Harry put a moratorium on all new store development no more construction I was opposed to it I was

in our offices the next morning waiting for Harry when he came in we went at it hammer and tongs I forced the issue all the way with the result that he resigned it was a hell of a mess and then Harry in turn makes a drastic mistake probably influenced by his emotions Harry had a substantial chunk of McDonald's stock but he was so certain that the company would go down the shoot when he left that he sold it all the sale gave him a few million dollars at the time had he kept it his stock would be worth over $100 million and then listen to the words that he's going to describe Harry's actions so his lack of faith there's that word again so his lack of faith in us was very costly for him and so he has to let a bunch of people go and it doesn't stop there there was one other thing I had to do to set the situation in the Chicago office straight and that was to ask June Martino to retire it was a tough thing

for me June was a wonderful person but and she had been a tremendous asset to the organization but she was part of the old regime and her approach would no longer work she held on to her stock however and it made her extremely wealthy did you catch what just happened there he fired the woman who missed all of her kids' birthday parties for the company and so by now McDonald's is a public corporation Ray Croc is unbelievably wealthy he winds up buying the San Diego Padre's baseball team he's still with his second wife but we see that this guy is a little nuts and he just can't stop I hadn't seen Joanie for 5 years when we met at the western region operators convention in San Diego truthfully I didn't expect to be hit by the same wave of emotion that had bowled me over before but that's exactly what happened I attended a small dinner party the first evening of the convention and Joanie was there with her husband I made

sure that Joanie sat right next to me Raley that's her husband's name Ry you sit down there at the other end I said everyone tittered they thought I was kidding little did they know and when I made my after dinner speech about how I had tained all I had ever wanted in life except for one thing little did they suspect that the missing element all I needed to make my life complete was sitting there at the very table beside me and so Ray says again let's both get divorces and get married when when he said this last time he was married to Ethel now he's married to Jane and this time Joanie says yes I didn't want to hurt Jane any more than was necessary but I had to have a divorce immediately and then he immediately turns around and marries Joanie Joanie and I were married in 1969 At Last I felt like I was a complete person now I told myself I could take life a little easier and enjoy it I was finished grinding it out

but business is not like painting a picture you can't put a final brush stroke on it and then hang it on the wall and admire it we had a slogan posted on on the walls around headquarters that says nothing recedes like success don't let it happen to us or you I wasn't about to let it happen to me the key element in individual success stories and McDonald's itself is determination this is expressed very well in my favorite saying press on nothing in the world can take the place of persistence Talent will not nothing is more common than unsuccessful men with Talent genius will not not unrewarded genius is almost a proverb education will not the world is full of educated idiots persistence and determination alone are omnipotent that's the spirit that built 4,000 mcdonal hamburger restaurants dedicating the 4,000th restaurant was quite a milestone now we're shooting for 5,000 personally I'm thinking about number

10,000 a lot of people would say I'm Dreaming well they be right I've been dreaming all my life and I'm sure as hell not going to stop now and he never does stop Ray works at McDonald's until the day he dies even after being confined to a wheelchair and that's where I'll leave it for the full story highly recommend reading the book if you buy the book using the link that's in the show notes in your podcast player you'll be supporting this podcast at the same time if you have not yet signed up for the founders premium feed make sure you do that that link is in the the show notes as well and available at Founders podcast.com signing up gives you access to listen to the ask me anything episodes that I've make and is a fantastic way to support the podcast if you want to get on my free email newsletter that link is also in the show notes I email my top 10 highlights of every book that I read as always links

below and available at Founders podcast.com that is 293 books down 1,000 ago and I'll talk to you again soon okay so all the way back on episode 227 I read this fantastic book called The essays of Warren Buffett so all the way back on episode 88 I read every single one of Warren shareholder letters but what this book that was put together by Lawrence Cunningham uh called the essays of Warren Buffett uh did that was so smart is that he took the shareholder letters and instead of organizing them by year which is standard he organized them by topic and so in the original podcast I did on this book which again is episode 227 1 hour and 28 minutes into the podcast or thereabouts I go over this letter that I'm about to read to you now it's under the heading titled on selling one's business and the reason I'm bringing this up is because one of the sponsors of this episode is Tiny and one way that tiny has been described is

that they're building the birkshire of the internet and you can go to tiny.com and read the testimonials and see all the founders that have sold their business to Tiny and how their main differentiation just like Warren Buffett and Charlie Munger is there's no BS we're going to make this transaction as simple and easy as possible where a lot of people that buy businesses make you jump through hoops and it's just a headache and so if you think about what Warren is doing here in this letter is his business is buying businesses and so his customer are founders or managers of businesses and so he is essentially writing a letter to a guy so he wrote this letter in uh 1991 to a guy who indicated he might want to sell his family business and so I'm just going to pull out a few highlights here and really think about what Warren's doing is he is differentiating his services from other people that also buy

businesses he says if you if you should decide to sell I think birkshire hathway offers some advantages that most other buyers do not practic ically all of these buyers will fall into one or two categories and so now Warren is going to describe his competition if you go to tiny.com you'll see they described their compet in some ways their competition which is typically VCS or private Equity companies okay so Warren says number one a company located elsewhere but operating in your business or in a business someone Akin somewhat akin to years such a buyer no matter what promises are made will usually have managers who feel they know how to run your business operations and sooner or later will want to apply some Hands-On and he puts the word help in quotation marks obviously Warren does not think that the managers they're going to install in that business are actually going to be helpful at all the second

other option a financial maneuverer invariably operating with large amounts of borrowed money who plan to resell either to the public or to another Corporation as soon as the time is favorable frequently this buyer's major contribution will be to change accounting methods so that earnings earnings can be presented in the most favorable light just prior to his bailing out and then listen to this persuasion technique that he uses cuz he's writing to somebody that he knows it's a family business which means they put a lot of their time and life energy into so he says if the sole motive of the present owner is to cash their chips and put their business behind them and plenty of sellers do fall into this category either type of the buyer that I just described to you is satisfactory but if the seller's business represents the creative work of a lifetime and forms an integral part of their personality and sense of being buyers of

either type have serious flaws so he's just described his competitive landscape he says listen there's option one there's option two but then there's a new Option something that's completely different and better and he's describing the services that he provides to Founders right so he says birkshire is another kind of buyer a rather unusual one we buy to keep tiny does too by the way all of the businesses we own are run autonomously to an extraordinary degree when we buy a business the sellers go on running it just as they did before the sale we adapt to their methods rather than vice versa and in Tiny's case it's up to the founder if they want to stay or if they want to go Tiny's fine with either solution and then Warren does something fantastic he's like listen you know who the P the past businesses that we bought in fact I'm including in this letter Hey listen of every single person we've ever bought a business from Tiny

does something very similar on their website which you can go see you know some of our past purchases I'm enclosing a list of everyone from whom we have ever bought a business and I invite you to check with them as to our performance versus our promises and then Warren says hey I'm going to keep it simple with you if you should decide to do a business do business with birkshire we would pay in cash tiny says the exact same thing on their website your business would not be used as collateral for any loan by birkshire there would be no Brokers involved Warren also says you deal with me and finally you would know exactly with whom you are dealing you would not have one executive negotiate the deal only to have someone else in charge a few years later or have the president regretfully tell you that his board of directors required this change or that change and because Warren has hacked away at the unessential all that is left

is Simplicity and his pitch is simple do you want a great home for your business then call me and I will do a cash transaction really fast same thing that tiny does I will not pester you if if you have any possible interest in selling I would appreciate your call I would be extraordinarily proud to have birkshire along with the key members of your family own blank so he took out any identifying information of who he's writing to okay I believe we would do very well financially and I believe you would have just as much fun running your business over the next 20 years as you have during the past 20 sincerely Warren Buffett I think reading the entire letter is worth your time if you buy the book it's on pages 230 through 233 and make sure you go back and listen into episode 227 the essays of Warren Buffett if you have not done so already and if you have a business that you're interested in selling now or in the

future make sure you go to tiny.com