McDonald’s has come a long way from its humble beginnings in the mid-1950s. Director, John Lee Hancock, tells the story of how one small burger joint in California exploded internationally in The Founder. The movie shows fast food service as the brainchild of two brothers, Dick and Maurice McDonald. When businessman Ray Kroc stumbles upon their restaurant, he convinces them to replicate their concept across the United States by franchising the business. As a Master Franchisee, Ray Kroc sets up stores one by one, before the McDonald’s brand snowballs into the franchise giant it is today. We’ve taken six lessons for franchisors which they can learn from the movie and apply to their own business.

1. Remember, It’s All About Control

One of franchising’s differentiating factors is the franchisor’s ability to control and set the standards of the franchisee stores across the country (as opposed to, for example, a licence arrangement).

As a franchisor, you must consider how you will set up a business that others can easily replicate in other stores. The McDonald brothers carefully chose a small selection of menu items to focus on so that they could provide quality food with a quick turnaround. Consequently, they could train their employees to perfect an efficient system of preparing burgers, milkshakes and fries. Training is an effective way to ensure standards are the same across the franchises.

The McDonald brothers had attempted to franchise their burger business previously but had given up because they couldn’t provide the same quality of service at each store. Enter Ray Kroc – who focusses on ensuring that each store serves the same food and meets the same service standards.

The franchise agreement sets out the parties’ rights and obligations, including the franchisee’s obligation to run the business according to the franchisor’s system as a whole. Many franchises also have an Operations Manual detailing the day-to-day requirements with which franchisees are to comply.

2. Choose Your Franchisees Selectively

Selectively choosing your franchisees is a good way to maintain control over your franchise. As a franchisor, you are licensing your brand and reputation, so it’s important to choose franchisees who share your vision and goals. Ray Kroc’s first few franchisees weren’t interested in building the McDonald’s brand or even providing quality service to customers. They did not focus on training employees and maintaining quality control across stores. Choosing your franchisees is like hiring an employee – ensure they are ready to work hard and want to be part of growing their own business (and yours). 

3. Value Your Brand and Your Reputation

As a franchisor, you would have invested time and money into building a reputation associated with your trade marks and branding. The McDonald brothers gave Ray Kroc and the franchisees permission to use the name ‘McDonald’s’ for the burger joints across the United States. 

When asked why Kroc didn’t simply use his knowledge of how the original McDonald’s operated to set up his own franchise, Kroc incorrectly responded that it was the name ‘McDonald’s’ that added value and was responsible for its success. In fact, it was the hard work of the McDonalds brothers and Ray Kroc that built the brand and gave value to the trade mark.

Don’t underestimate the value and the goodwill you have built. The movie highlighted how Kroc first had to approach acquaintances to convince them to become a McDonals’s franchisee. As the business began to grow, however, franchisees were approaching him.

4. The Golden Arches – a Distinctive Mark

The name McDonald’s was not the only significant branding tool that the brothers used. Trade marks are a symbol used to distinguish your goods and services from that of another trader. The McDonald brothers dreamed up a fast food burger restaurant with two golden arches framing the building so that it would stand out from other buildings. Those golden arches have now become one of the world’s most recognised symbols. Choosing a distinctive symbol or name will help your business stand out from your competitors and make trade mark registration easier. IP Australia will only register a trade mark if it’s distinctive (i.e. it’s capable of distinguishing its goods and services from other businesses).

5. Set Reasonable and Fair Royalties or Fees

A franchise must be profitable for all parties – the franchisor, master franchisee and franchisees. A party may question the value of the franchisee if they do not generate a profit. The McDonald brothers and Kroc’s original agreement gave them each less than 2% of the franchisee’s earnings, and Kroc soon found himself unable to pay his own bills.

Consider how much you are going to charge your franchisees on an upfront or regular basis carefully. The fee could be an upfront amount as an initial capital investment fee, payment for goods or services, a percentage of income or even a training fee. Work out what amount and on what basis will make the franchisee’s business operable, and what will make the franchise as a whole successful.

6. Consider How Your Franchisees Will Lease Premises

When Kroc was struggling with the little royalties he was receiving, he resolved the problem by purchasing land and leasing the premises to franchisees, guaranteeing him a rental income and greater control. This arrangement is uncommon among Australian franchises. However, franchisors do typically sign a head lease and sublease the premises to their franchisee.

A franchisor who is the lessor has greater control over the quality and standards of the premises. The franchisor can also evict a franchisee if he or she is not complying with the franchise agreement or operations manual. 

If you are the lessee under the head lease, the lessor will hold you liable if the sublessee (your franchisee) doesn’t pay rent. So, you should weigh up the advantages and disadvantages to determine what is appropriate for your business.

Key Takeaways

When setting up a franchise, there are a number of points you should first consider. How you develop your brand and establish your reputation is important when it comes to maintaining the standards of your products or services across your franchisees. The Franchising Code of Conduct in Australia sets out the rights and obligations of both parties to a Franchise Agreement, so you need to make sure that your decisions are compliant. If you have any questions or need assistance setting up a franchise call LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Dhanu Eliezer

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