The word Franchise comes from old French meaning privilege or freedom. In the middle ages a franchise was a privilege or a right. In those days, the local sovereign or lord would grant the right to hold markets or fairs, to operate the local ferry or to hunt on his land. This concept extended to the Kings granting a franchise for all manner of commercial activities such as building roads and the brewing of ale. In essence the king was giving someone the right to a monopoly for a certain type of commercial activity. Over time the regulations governing franchises became a part of European Common Law.
Over the centuries the franchising concept has evolved as the economies of the nations of the world have evolved. In the 1840’s in Germany certain major ale brewers granted franchises to certain taverns, giving those taverns the exclusive right to sell their ale. This was the beginning of the concept of franchising as we know it today.
The first American franchise is reputed to be the Singer Sewing Center, developed by Isaac Singer in 1858. After Singer invented the sewing machine, he encountered two significant obstacles in bringing it to market. Consumers had to be taught how to use the new invention before they would buy, and Singer lacked the capital to manufacture his machine on a mass basis. Once Singer seized upon the idea of selling the rights to local business people to sell his machine and train users, his enterprise expanded rapidly. Fees for the license rights helped fund his manufacturing, and because each franchisee was self-financed, Singer was spared the expense of hiring each center’s manager. Singer had written franchise contracts, which were the forerunners of modern franchise agreements.
In the 1880’s cities began to grant monopoly franchises to streetcar companies and utilities for water, sewerage, gas and later electricity.
Around the turn of the century, the oil refinery companies and the automobile manufacturers began to grant the right to sell their products. At this stage in the evolution of franchising it was essentially just the granting of the right to distribute and sell a manufacturer’s products.
Business format franchising, which is the dominant mode of franchising today came onto the economic scene after World War II with the return of the millions of US servicemen and women and the subsequent baby boom. The baby boom is still driving the economy and will continue to do so into the next century. There was an overwhelming need for all types of products and services, and franchising was the ideal business model for the rapid expansion of the hotel/motel and fast food industries.
During the explosion of the 60’s and 70’s there were many abuses in franchising. There were a number of totally fraudulent franchise companies that literally took peoples money and ran, and there were a number of companies that were undercapitalized and poorly managed which went bankrupt, leaving a trail of failed franchisees who had lost everything.
It became clear that the franchise industry had to change in order to remain a viable business concept. On the industry side, The International Franchise Association was created with the specific intent of uplifting the entire industry. The IFA holds training in all aspects of franchising which greatly enhances the professionalism of the industry. Members of the IFA are required to adhere to the IFA’s Code of Ethics which set a high standard. The IFA works closely with the U.S. Congress and the Federal Trade Commission on improving how the industry relates to the franchisees.
On the government regulatory side, the Federal Trade Commission, in 1978, required that all franchisors submit to all potential franchisees a disclosure document called the Uniform Offering Circular or UFOC, before receiving monies. The UFOC provides very detailed information on the franchise company, such as its history, information about the officers, litigation history, audited financial statements, the franchise agreement, which is the contract between the franchisor and franchisee and a current list of franchises with owners names and telephone numbers. The intent of the UFOC is that it provides enough information so that the prospective franchisee can make an informed decision. The FTC doesn’t actually review the UFOC unless there is a complaint and it decides to conduct an investigation.
Also there are a number of states called registration states which have their own requirements that must be met before a franchisor is allowed to sell franchises in their states. In some cases these requirements are more stringent than the FTC’s.
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