10 November 2014
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A Brief Look at the History of Franchising in the United States

Do you know how the first franchise started? How about its 20th century expansion? Today, we would like to share with you the history of franchising in the United States, dating back to the mid-19th century.

Isaac Singer and his company, the Singer Sewing Machine Company, generally get credit as initiating franchising in the United States.

As a way to sell and service its products, Singer established a network of salesmen and dealers in the 1850’s that paid for the right to distribute sewing machines in a certain region.

Although these arrangements were not overly successful for Singer and were phased out after about a decade, the seeds for the future of franchising had been planted.

The roots of franchising go even further back a few centuries in Europe during the middle ages where local land owners would grant rights to people for some form of compensation to conduct business or activities such as markets, fairs, hunting, or farming. These rights had rules and these rules evolved into common law.

Actually, the word franchise has Anglo-French origins and means freedom or liberty derived from the French word franchir (to free) on Old French word franc (free).

Franchising moves into the 20th Century

In the late 1800’s railroad and utility companies were looking to speed up their growth and expand their influence. The method they used was an early form of franchising.

Through the selling of subsidiary rights of their names and systems to businesspeople or investor groups, these entities were moving more quickly in opening new sets of tracks or a new power plant in additional towns.

This led to the creation of product or trade name franchising, a distribution system based on the granting of a license. This allows the franchisee to sell goods produced by the franchisor or produce finished good from proprietary materials or formulas supplied by the franchisor.

This form of franchising had a large impact on the areas of automobiles sales, gasoline sales, and soft-drink bottling.

Post World War II and the modern form of Franchising

After World War II, American society started to drastically change. As the population quickly grew, people started to move in mass numbers out to the suburbs. As this happened the automobile started to play a larger role in everyday life.

In response to the expanding needs of this new society, restaurants specializing in fast take-out or dine-in meals began to emerge. Most of these were locally owned, but some nationally franchised chains existed such as A&W Root Beer.

In the 1950’s Burger King, Dunkin’ Donuts, Dairy Queen, Burger Chef, and Chicken Delight entered to serve this trend. Franchising was undergoing a vital evolution at this time.

Rather than just granting a license to distribute or sell a product, these food franchises; joined by non-food business such as Holiday Inn, Midas Mufflers, and H&R Block; were installing a hugely different type of franchise system. These franchisors were selling the right to adopt an entire business concept.

Ray Kroc and McDonald’s entered this rapidly changing franchise atmosphere in the mid-1950’s. Observing the expanding fast-food franchise industry as a traveling salesman, Kroc evaluated the strengths and weaknesses of franchising and utilized these considerations as a guide in building McDonald’s.

Further Growth and Regulation

Through the 1950’s, 60’s, and 70’s the number of franchised businesses continued to grow. As this occurred the need for legislation and consumer protection was necessary. In 1978 the Federal Trade Commission enacted a law requiring franchisors to provide prospective franchisees the Franchise Disclosure Document (FDD) prior to accepting any money. The FDD provides comprehensive information on the franchise company.

In addition to the federal requirements that were put into place, a number of registration states have established their own set of rules to be met in order for a franchisor to sell franchises in their states.

Today

According to the International Franchising Association (IFA), nearly 750,000 franchise businesses employ over 8.5 million workers in a $1.3 trillion industry in the United States.

Franchises are regarded as a far superior business strategy to start-ups. Entrepreneur Magazine reports that the average failure rate for new businesses in their first five years of operations is around 65 percent. With this in mind, franchised companies see just a 3 to 11 percent annual turnover.

Beyond the statistics, prospective business owners are partial to franchise models because of the brand recognition, consistent service, highly developed and proven operating systems, and the security.

Are you interested in learning more about franchising and your business? If so, download the free e-book “Franchising Your Business.” While you are at it, take the franchise quiz today! For further assistance call 800-FRANCHISE (800-372-6244).

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