The History of Franchising
How did franchising develop into the economic powerhouse it is today? You may find it interesting to take a look at franchising history. The word “franchise” is of Anglo-French derivation—from franc, meaning “free.” Franchising developed over time as an efficient way to do business.
In the middle ages, the local landowner would grant rights to the peasants or serfs, probably for consideration, to hunt, hold markets or fairs, or otherwise conduct business on his domain. With the rights came rules, and these rules became part of European Common Law. This model was the forefather of franchising.
Franchising history milestone: Singer’s sewing machine
Isaac M. Singer is credited with beginning the modern use of franchising in the U.S. In the early 1850s, he wanted to more widely distribute his sewing machine. However, he lacked the funding needed for manufacturing a large number. Another problem: people wouldn’t buy his machines without training on how to use them, a service that retailers did not know how to provide.
Singer’s solution generated money for manufacturing the machines. He charged licensing fees, giving licensees the right to sell his machines in certain geographical areas. These licensees took on the responsibility of teaching people how to use his machines. Singer’s model was so successful and his sewing machines so widely distributed that today the brand is a household name.
Franchising grew and developed following the success of Singer’s distribution methods. The dominant mode of today’s franchising is known as Business Format Franchising. The franchisor licenses its brand name, trademarks, and entire business concept to its franchisees. This model emerged after World War II and the baby boom. At that time, the public had an overwhelming need for all types of products and services and franchising provided a way to quickly grow businesses.
Franchising history milestone: the Golden Arches
In 1954, a milkshake-mixer salesman named Ray Kroc discovered the McDonald brothers’ small hamburger stand in San Bernardino, California. Kroc is credited with unleashing the wave of franchising we know today. He discovered the very reason the McDonald brothers were buying so many of his mixers: their high-volume production system enabled them to provide fast service with consistent results at a low cost. Kroc became their licensing agent and recruited franchisees, starting in the Chicago area. In 1961, he bought out the McDonald brothers’ interest and took the title of senior chairman. By 1988, McDonald’s had opened 10,000 restaurants. Today there are more than 35,000 McDonald’s restaurants worldwide.
Franchising history milestone: organization and regulation
As the number of franchised businesses grew, there emerged a need for legislation and consumer protection. The International Franchise Association (IFA) was founded in 1960 as a membership organization of franchisors, franchisees, and suppliers. Its purpose is to assist and guide the entire industry. The IFA Code of Ethics establishes best practices and represents ideals to which all IFA members agree to subscribe. The IFA works closely with the U.S. Congress and Federal Trade Commission. It has been integral in the expansion of franchising around the world.
In 1978, the Federal Trade Commission enacted a law mandating a document now known as the Franchise Disclosure Document (FDD). The law requires franchisors to provide an FDD to all prospective franchisees prior to accepting any funds from them. In addition, franchisors must present the information in a consistent, straightforward, and relatively easy to understand manner. The result: all prospective franchisees have the opportunity to make an informed decision.
The FDD contains details about the franchise company including its history, officers, any litigation history, and estimated investment. The FDD must include a current list of franchise owners and their contact information. This enables prospective franchisees to research the franchisor’s claims by speaking with current franchisees.
In addition to federal regulations, 15 states have their own set of requirements that franchisors must meet in order to sell franchises. Since these requirements differ in each state, franchisors often move into these areas slowly, if at all.
Franchising has an enormous impact on the U.S. economy. According to a report released in January 2018 by the IFA, conducted by IHS Markit Economics, there are over 759,000 franchises in the U.S., employing over 8 million people. The report forecasts that franchise employment growth will continue to outpace economy-wide employment growth. It projects that the output of franchise businesses will increase to $757 billion in 2018. Franchising is clearly a powerful model to help people realize their dreams.