Without a business model do you really have a business?

It's McDonald's taking the Limelight @ Changi ...
 (Photo credit: williamcho)

Any start-up or small business needs a viable business model.

Have you developed your business model?

Go back to the early beginnings of the McDonald’s fast-food restaurant. Although Ray Krok put together all the elements to make McDonald’s a winner, there was one flaw in his plan:

McDonald’s had no way of making a profit.

Almost all McDonald’s income came from the 1.9% service fee it charged franchisees on their food sales, according to “McDonald’s: behind the Arches” by business writer John F Love.

Franchisees had to turn over one-quarter of the 1.9% service fee (0.5%) to the McDonald’s brothers. There were no big up-front fees for territorial licenses. The initial franchising fees were only $950 at the time and gradually went up to $1500 and later $10,000 in 1961.

Krok didn’t make much either from his Prince Castle Sales Division selling franchisees $150 Multi-mixers. The margins were small.

Love says, “On principle, Krok had rejected all the conventional means of making money on franchising, but he had not replaced them with a moneymaking scheme he found palatable.”

In fact, everyone was making money on McDonald’s except Ray Krok’s company. Stores achieved strong annual sales but McDonald’s received only minimal payments in service fees.

Harry J. Sonneborn, the McDonald’s financial whizz, came up with a plan. Sonneborn proposed “a strikingly simple solution”. He decided that McDonald’s would form a separate real estate company called Franchise Realty Corporation which would locate and lease store sites from landowners willing to build McDonald’s units.

Love says Franchise Realty would enter into 20-year improved leases with property owners and sublease stores to the franchisee. The company charged the franchisee a markup for real estate services.

This was a fair solution for franchisees who couldn’t afford to pay upfront for property. It gave McDonald’s an immediate and stable cash flow. This helped McDonald’s finance their store expansion more rapidly.

Presenting McDonald’s as a real estate company was “close to heresy” for the chain’s founder. But this business model helped McDonald’s expand rapidly and provided a steady income stream.

Sonneborn once said, “We are not basically in the food business. We are in the real estate business. The only reason we sell 15-cent hamburgers is because they are the greatest producer of revenue from which our tenants (McDonald’s franchisees) can pay us our rent.”

Building a business model was key to McDonald’s long-term success.

For a startup or small business it’s not something that can be done overnight or even in the first few weeks or months.

But it is important to build your business model as soon as you can to ensure your long-term success.

Most important — your business model should benefit both the financial viability of your business and offer better value for your customer (as it did for the McDdonald’s franchisees).

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