Modern franchising may be seen as an ingenious American concept, but the history of franchising actually dates back to the middle ages. Franchising has grown with the economic needs and the consumer’s desire for standardized and predictable products and services.
Middle Ages. The origin of the word franchise goes back to Anglo-French, meaning freedom, liberty, and from Middle French, franchir, to free, and earlier from Old French franc, free. In the middle ages, the king, lord, or local land owner would grant the peasants or serfs the right to hunt, hold markets, or conduct business on his land. In return, the peasants or serfs would pay the king, lord or local land owner some kind of consideration and abide by his rules.
1840s. In Germany, major ale brewers granted franchises to certain taverns so that the taverns would have the exclusive right to sell certain ale.
1851. I.M. Singer & Co. (the Singer Sewing Machine Company), accidentally became the forerunner of modern franchising. Singer had improved an existing sewing machine model and wanted to find a wider distribution, but he had a few barriers: he lacked the funding required to increase his manufacturing; the public was skeptical about the product; and service retailers were unable to train the customer on how to use the product. Singer decided to charge licensing fees to people who would own the rights to sell his sewing machine in specific geographical areas. The licensing fees provided the funding required for increasing his production. Then, the licensees became responsible for educating the customers on how to use the sewing machine. By 1855, Singer was the world’s largest sewing company, began overseas expansion (starting in Paris, France), and was the world’s first international company.
1880s-1950s. Cities began to grant monopoly franchises to street car companies and utilities for water, sewer, gas, (and later) electricity. Oil refinery companies, soft drink bottlers, and automobile manufacturers began to grant rights to sell their products.
1930s. In 1925, Howard Johnson bought a small corner drugstore which sold candy, newspapers, and patent medicine. The store expanded into ice cream sales and then evolved into a restaurant. Despite the stock market crash in 1929, Howard Johnson convinced an acquaintance to open a “Howard Johnson’s” restaurant similar to Johnson’s. By the end of 1936 there were 39 more Howard Johnson’s franchises. By 1954, the company entered into the motor lodge business. In 1959, Howard Johnson turned over the company to his son, Howard Brennan Johnson, who ran the company for the next 20 years. In 1979, Howard Brennan Johnson sold the company for more than $630 million, which remains with the Johnson family.
1954. Ray Kroc, a milkshake mixer salesman, went to the California hamburger stand which was running eight of his Multimixers. Kroc approached the owners of the hamburger stand, Dick and Mac McDonald, and asked them to open several of the restaurants so he could sell eight of his Multimixers to each one.
The McDonald brothers didn’t know whom they could get to open the restaurants, so Kroc volunteered. Kroc opened the Des Plaines, Illinois McDonald’s in 1955. Kroc became the licensing agent for the McDonald brothers and recruited franchisees. In 1961 he bought out the McDonald brothers’ interest. Today, McDonald’s Corporation has over 30,000 McDonald’s restaurants worldwide with more than $20 billion in revenue.
1950s-1970s. The return of service men and women after World War II and the baby boom created an enormous need for various products and services. Franchising met the need with its perfect business model for rapid expansion and gave consumers standardized products and predictable services. Some of the more recognizable franchise networks during this time were: Burger King, Wendy’s, KFC, Baskin-Robbins, Dunkin Donuts, Holiday Inn, Sheraton, Midas, 7-Eleven, H&R Block, and Pearle Vision Center.
1970s-present. Despite the successful expanding businesses we still recognize today, there were also many unscrupulous businessmen who abused the franchising model. There were completely fraudulent franchise companies which took money from the franchise purchaser (franchisee) and then disappeared. Other companies were undercapitalized and poorly managed which then went bankrupt.
In response to the growing number of franchised businesses and fraudulent franchising activities, the International Franchise Association (IFA) was formed by franchisors, franchisees, and suppliers to provide help and guidance to the entire industry. The IFA adopted a Code of Ethics to establish a framework of best practices in franchise relationships. Today, the IFA works closely with the United States Congress and the Federal Trade Commission to improve how the industry relates to the franchisees.
Unfortunately, the IFA’s Code of Ethics was not enough to stop the fraudulent franchising activities. In 1978 the Federal Trade Commission enacted the law, now known as the Franchise Rule, requiring franchisors to provide a lengthy document called the Uniform Franchise Offering Circular (UFOC) to all potential franchisees. The UFOC provides detailed information about the franchising company so that the prospective franchisee can make an informed decision.
In addition to the federal UFOC requirements, states have also established requirements for selling franchises. Some states require registration or notification under their own franchise laws. Other states regulate franchise sales under business opportunity laws, securities laws, consumer protection laws, and advertising laws.
There are many complex aspects to franchising. If you would like assistance with any franchise matters, please contact us at 970.612.1208 or info@patterson-tabert.com.