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At the time, the McDonald’s brothers were receiving 0.5% of sales as a royalty, which wasn’t too bad of a deal; with 1960 sales equal to $37.5 million, the payout (dividend) for that year would have been equal to $187,500. However, the brothers didn’t anticipate the explosive growth that McDonald’s would achieve in the next half-century: 2011 revenues came in at $27 billion, which understates the actual company-wide sales that the McDonald brothers' royalty figure was based on (revenue from conventional franchised restaurants as reported in filings only includes rent and royalties based on a percent of sales). Using rough data from the beginning of each decade and assuming straight-line growth intra-period, we can estimate the back of the envelope fees income of roughly $1.95 billion forgone over the past 50 years:
| 1961-1970 | $19M |
| 1971-1980 | $130M |
| 1981-1990 | $270M |
| 1991-2000 | $520M |
| 2001-2010 | $1B |
Obviously, this figure needs to be discounted; the McDonald’s received their money 50 years ago, which is obviously preferable to an equivalent dollar amount today. Using Excel, I put together the following IRR chart, which determines the initial value (the NPV) that would need to be paid (from Ray Kroc’s perspective) to achieve the stated IRR:
| 10% | $100 million |
| 20% | $16 million |
| 30% | $6.2 million |
| 40% | $3.2 million |
| 50% | $2 million |
As we can see here, the McDonald's interest held by the brothers was worth a substantial sum; they could easily have sought $16 million, which would have left the new owners (Ray Kroc and his partners) with a fat 20% annualized IRR through 2011. Unfortunately for the McDonald brothers, they were not privy to the data that we have to date and seriously underestimated the potential success of the franchise: They sold their stake for the meager sum of $2.7 million; the estimated IRR on that cash outlay has been an astounding 43%, compared to an annualized return from the S&P 500 of roughly 10% over that same period.
The biggest reason has been decades of unimaginable growth: From 200 locations at the start of the 1960s, the company had well over 1,000 restaurants by 1970, and opened its 10,000th and 20,000th locations in 1988 and 1996, respectively. As of 2011, the company had more than 33,000 locations across the globe, equal to a compounded annual growth rate in store count of nearly 11% over the past 50 years. Because of this, an investor could have paid $35,000,000, or 180 times the fee income received in 1961, and still have achieved an IRR of 15% through 2011.
This story has a broader lesson as well: Since the IPO in 1965, McDonald’s has encountered countless problems, many of which looked highly problematic at the time. Despite this, anybody who has purchased a stake in MCD at any point over the 57 years since the initial offering has been handsomely rewarded (those who have held it the entire time have attained 15%-plus annualized returns); that should put the importance of monthly sales data into context.
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You are assuming that the McDonald brothers would have had the same results by themselves that Ray Kroc achieved after he took over.
That is unjustified.
Some years ago a 3-year old horse named War Emblem won the Illinois Derby. The owner sold a 95% interest to trainer Bob Baffert. Baffert took the horse to California, trained it brilliantly, entered it into the Kentucky Derby and sent it on to victory.
Many thought the old owner got screwed. In fact he did great by selling. He had no plans to go to Kentucky nor was he qualified to get the job done in the same way world-class trainer Baffert was. He ended up with 5% of a very valuable Kentucky Derby winnner rather than 'just another good horse' on the minor league circuit.
Had the McDonald brothers not sold to Kroc most of us might never even have heard of MCD.