This Is How Ray Kroc Put The McDonald Brothers Out Of Business

McDonald's family-friendly image sits atop a history of ruthless business that sometimes undercuts its affordable hamburgers. McDonald's was originally run by brothers Dick and Mac McDonald (via Entrepreneur) who founded the company in 1940, but the reason you might recognize the golden arches today is for the practices of traveling salesman Ray Kroc.

In the beginning, McDonald's was a roadside hamburger stand, originally in San Bernardino, California. The concept was simple: burger and fries, shake or soda. In modern times, you'd liken this model to Dick's of the Pacific Northwest or In-N-Out Burger of California. This low overhead model allowed for affordable sales prices, fast food, and minimal expenses for things like restaurant space and inventory. While soda fountains were failing, the McDonald brothers were flourishing and Ray Kroc wanted in on the action. Kroc proposed to the brothers that he could expand their franchise for them (as they declined the entrepreneurial process), and the group teamed up in the effort.

Journalist Lisa Napoli says of Dick and Mac (via Marketplace): "They didn't want to expand; their life was great. They were buying new Cadillacs every year. They were working hard in their McDonald's restaurant. They were ambitious enough, but they weren't hyper ambitious to dominate the world."

Ray Kroc, however, had dreams of expansion — and these two life views didn't match up.

Kroc used a number of tactics to expand the McDonald's franchise. One was selling the burger sales model as a franchise and collecting 1.9 percent of the gross sales. This model was expanded after a meeting with businessman Harry Sonnenborne (the first president and CEO of McDonald's), who advised Kroc to also purchase the land the franchise could be placed upon, making him both landlord and licensor.

Napoli further describes the situation: "Basically what happened was that McDonald's grew and grew, and Ray needed the brothers to go away. He needed to rewrite the agreement so that he could own the whole company, so that they could be positioned to go public." 

As the franchises expanded, Kroc continually clashed with the McDonald brothers who were motivated to buy and source local, while Kroc wished to expand at rapid speed. Kroc is reported to have become so disillusioned with the brothers that he bought out the franchise for $2.7 million in 1961, but apparently this did not include the original burger stand in San Bernardino. When confronted with the holdout, Kroc said, "I'm not normally a vindictive man, but this time I'm going to get those sons-of-b*tches." It's then that Kroc enforced his purchase of the brother's own namesake restaurant and set up shop across the street until they went out of business. 

Says Napoli of the McDonald brothers, "They were sort of erased from history. They knew and had seen McDonald's grow under Ray's watch, but they didn't know that it one day would have tens of thousands of restaurants all around the world." And while Kroc may have put the brothers out of business, it should be noted that he did not leave them destitute. Concludes Napoli, "Now that's not to say that Ray wasn't a tough guy. Ray was ruthless, but he didn't screw them out of a half a percent of royalty."