Special Edition: History Of Franchising: This Business Model Is An Original--and A Winner

Many trace the origins of franchising as we know it today back to Europe in the 1800s, when German beer makers granted pubs and taverns the rights to sell and use their name. In fact, the word "franchise" is a French derivative meaning privilege or freedom.

Some might argue that franchising has been around as long as humans or commerce itself, but the fundamental idea is relatively simple. An entrepreneur can, through franchising, sell part of a business, its methods, and its name, to others who can then increase distribution, volume, awareness, and multiply financial results--for all parties.

As Michael Seid, managing director of Michael H. Seid & Associates points out, "Throughout its long history, there have been three constants that have fueled the growth of franchising: the desire to expand, the lack of expansion capital, and the need to overcome distance."

Isaac Merritt Singer, founder of the I. M. Singer & Company, was never one to miss out on a capitalistic opportunity. In the 1850s, Singer needed something to help him with his fledgling business and took note of the German distribution model. At the time, his company lacked sufficient capital to manufacture its sewing machines--and also needed a way to teach people how to use them.

His solution was to charge licensing (or franchise) fees to business people who would own the rights to certain geographical areas. The franchisees would also be responsible for teaching consumers how to use his machines. Using the licensing fees to fund manufacturing, he was then able to afford to build his machines and ship them directly to his newly formed distribution network. He had created a network of dealers.

Many say Singer's contract was what really sparked the creation of franchises in the coming years, as it would allow business owners to keep some level of control over how their franchisees operated. Not surprisingly, Singer's idea was quickly noticed.

Over the next several decades, other businesses began to copy and manipulate his business model. Coca-Cola introduced franchising into its manufacturing and bottling areas to reduce financial risk and gain market share. And by bottling its soda closer to population centers the company could reduce distribution costs.

The list of companies incorporating the franchise model grew as automobile manufacturers created a network of licensed dealerships to sell and service their vehicles. Oil companies latched on to the business concept to create gas and service stations to keep those cars moving.

But franchising really blossomed in the post-war 1950s and 1960s. Franchisors of convenience goods and services seemed to be popping up on every corner. McDonald's, Kentucky Fried Chicken, laundry services, dry cleaners, hotels, and rental car franchises flooded the marketplace.

One of the early franchise behemoths, McDonald's, opened 1,000 units in just 10 years. Midas Muffler reached 400 locations, Holiday Inn grew to 1,000 locations, and Budget Rental Car topped 500, all during the same time period.

But growing pains became evident, and by the end of the 1960s trouble was brewing. Many franchisors had begun focusing more on the sale of franchises than on supporting and operating successful franchise systems. Others made misrepresentations in how they recruited prospective franchisees. There were other problems as well.

This misrepresentation led some states, like California, to enact laws governing the disclosure of information to potential franchisees. These states required the franchisor to deliver to a potential franchisee a disclosure document providing information on the opportunity. But it took until the summer of 1979 for the Federal Trade Commission to issue the Franchise Rule, which established minimum disclosure requirements throughout the country.

After a period of cooling and oversaturation, franchising began to make a comeback of sorts during the late 1980s and early 1990s. This growth has continued, with some ebb and flow, steadily through today. According to a study by PricewaterhouseCoopers: franchise businesses are responsible for 40 percent of all retail sales in the U.S; there are more than 750,000 franchise businesses that generate almost $1 trillion in annual sales; and franchises employ more than 18 million people in the U.S. directly, and over 25 million indirectly.

As it has always done, the franchising model continues to evolve and adapt. For example, over the last decade, multi-unit franchising has emerged to play a significant role. No longer content to operate a single standalone franchise unit, many savvy and aggressive franchisees have opened up several units, and some, even several different brands.

The franchising model works because it provides a formula for operating a successful business by delivering a uniform product and service to customers. It provides franchisors with the capital they need, creates distribution channels, and gives consumers a recognized standard of what to expect and a higher perceived value. Done right, it's a model that benefits business owners, operators, and customers alike.

As the French might say, "Vive La Franche!"

U.S. Franchise Facts

• Franchise business companies: 1,500+
• Franchise business units: 750,000+
• Direct franchising employment: 18+ million
• Economic output: approx. $1.5 trillion (2004)
• Retail sales: 40 percent of all U.S. retail sales
• New franchise openings: one every 8 minutes
• One in 12 businesses is a franchise
• More than 75 different industries use franchising to distribute goods and services.
• Average initial franchise investment: $250,000 (excluding real estate)
• Average royalty fees paid by franchisees: 3 to 6 percent of monthly gross sales