McDonald's stopped collecting royalties and started owning the land

By the mid-1950s Ray Kroc's McDonald's franchise system was growing in store count but not in cash: Kroc's agreement with franchisees was a royalty of roughly 1.4% of sales, a thin enough cut that the corporation stayed perpetually short of cash even as the chain expanded. The royalty also gave Kroc almost no real leverage — a franchisee who let quality slip or ignored the McDonald's system could simply keep paying the small royalty, and Kroc had no lever to force compliance beyond persuasion.

Harry Sonneborn, a financial executive Kroc met in early 1956, diagnosed the model itself as the problem rather than the royalty rate. Raising the royalty percentage would have made franchisees resist and made the chain harder to sell, and it still wouldn't have given Kroc control over how each store was run.

Sonneborn set up the Franchise Realty Corporation in 1956 to buy or lease the land under each McDonald's location directly, then sublease it to the franchisee at a markup of roughly 20-40% over McDonald's own carrying cost, later folding in the buildings and mortgages too — with a franchisee down payment as low as $950 financing much of the acquisition.

Bought the land under each location and subleased it back at a markup, turning a weak sales claim into fixed rent and a lease they could terminate to enforce standards.

Rent is fixed, so McDonald's got steady cash regardless of store sales.

Franchisees needed the land to operate, giving McDonald's real enforcement power.

Terminating a lease was a credible threat, unlike withholding a small royalty.

The markup on subleases turned real estate into the company's main profit engine.

If your revenue stream is thin and gives you no control, own the one asset your partners can't operate without and lease it back to them.

The 'Sonneborn model' is credited as the financial turning point that let McDonald's scale past 200 locations by 1960 without running out of cash, and it persists today: by 2015 McDonald's property holdings totaled $37.7 billion, about 99% of the corporation's total assets and roughly a third of its annual gross revenue, meaning the hamburger chain's core balance sheet is a real estate portfolio.