The History of Franchising

The History of FranchisingThe History of Franchising is a fascinating topic with roots that go back far longer than most people realize. Although there is no single, comprehensive and authoritative work on this subject, there are a few reputable individuals and organizations that have worked hard to compile an accurate history of franchising.

The best place to start would be the etymology of the word itself. The word ‘Franchise’ comes from the French word – ‘franc’. Meanings of the word Franc generally fall into two different categories. Often you hear the word translated to mean – ‘Freedom from servitude’. In other publications, the word is translated to mean ‘granting of a right or a privilege’. Today we see ‘franc’ used in conjunction with money or currency. For example, the ‘French Franc’ or the ‘Swiss Franc’. In many ways, each of these usages are similar in that they all allow for greater personal freedom and control.

Franchising as a way to expand a business while also maintaining control dates back thousands of years possibly as far as the Romans and/or the Chinese according the Lloyd Tarbutton; however, the first use of the word ‘Franc’ to deliver a right or provide was probably found in Europe in the early 1400th century. According to the History of Franchising as found on the BFA website, in feudal England, the Crown owned and controlled the land. The Crown would grant noblemen and the church the right to protect that land. In return, both the noblemen and the Church would be able to charge a tax for this protection, part of which would be shared with the Crown. In some cases, these rights would be subdivided to include hunting privileges or other monopolistic rights within the given geographic area.

As time went by, a variety of businesses, predominately in Europe, used franchising to grow and control their product distribution business. These included The British East Indies Company (1602), London Company (1606), the brewery/pub industry in the mid 18th century and others.

So far, everything we have discussed involves Europe. So, who was the first Franchisor in the United States? Often you will hear people mention that Albert Singer was the first American Franchisor. Recent historical research conducted by Seid and Associates clearly labels this claim as false. Albert Singer and the Singer Corporation never franchised. (Click Here to learn more about Albert Singer). Seid and Associates has also discovered written contracts showing that the first franchisor in the United States was actually Benjamin Franklin with his printing business. Prior to the war of independence, Benjamin Franklin was granted the position of Postmaster General of the colonies. As a result, Mr. Franklin controlled the supply of paper into the colonies. Through this position, he was able to build a successful printing business through ‘co-partnerships’. This is the British Law equivalent to what is now thought of as franchising.

Over time, franchising evolved to into ‘Business Format Franchising’. Until this point in time, all franchises relied on exclusive control of products or assets. Business format franchising relies on the value of the business operating system in addition to exclusive control of product or assets.

Who was the first business format franchisor? It is generally agreed that Martha Matilda Harper developed the first business format franchise in the United States around 1891. The Harper Salons eventually grew to include approximate 500 locations by the mid 1920’s. (Click here if you wish to listen to my podcast with Jane Plitt – author of Martha Matilda Harper and the American Dream).

At the same time as the development of Martha’s beauty salons, Western Auto Supply Company developed a franchise system that included both product and a business operating system. The Western Auto system included many of the support services that we have come to expect in business format franchising

The boom in franchising really did not start until the 1950’s. This was a time of growth for the United States economy and franchising provided the vehicle for many individuals who wanted to own their own business. Brands that established themselves during this time include, McDonalds, Big Boy, White Castle, Dairy Queen, Paul Davis, Martinizing, H & R Block and many others.

There is considerable interest in the history of McDonalds. It is a common misperception that Ray Kroc was the founder of McDonalds. He was not. McDonalds was founded in 1937 by Richard and Maurice McDonald in East Pasadena, California. Over the years they opened additional locations and more fully developed the ‘self serve’ concept that is so evident in today’s fast food restaurants. By the early 1950’s they had lines out the door. In 1952, the McDonald brothers accepted their first franchisee, Neil Fox, who opened his location in Phoenix. Over time, the McDonald’s brothers franchised additional locations and proved out the franchise concept. It was in 1957 that Ray Croc entered the equation by purchasing the franchise rights for areas outside of California.   By the time Ray Croc bought out the McDonald Brothers, there were a few hundred locations around the United States. (For more information on the history of McDonalds, read McDonalds Behind the Golden Arches by John Love).

The rapid growth of franchising led to a type of gold rush and where there is opportunity there is abuse. Some franchise companies began to sell poorly designed franchise systems and make false representations. It was clear that something had to be done. As would be expected, California led the charge with a body of law instituted in 1968. Over time the FTC realized that a federal law designed to create transparency and to deliver specific information was necessary. In 1978 the FTC issued a body of law commonly called The Franchise Rule . The Franchise Rule requires every franchisor create and maintain an up to date disclosure document which was called a Uniform Franchise Offering Circular (UFOC).

In 2008, the FTC updated The Franchise Rule in order to both clarify and improve the disclosure document. The result is the Franchise Disclosure Document (FDD). All franchisors in the United States are required, by law, to deliver their FDD to any prospective franchisee at least two weeks prior to entering into a contract or upon reasonable request.

Although many franchisors were not supportive of federal regulation, in many ways, the creation of a formalized disclosure regime was critical to the exceptional success that franchising continues to see. The disclosure requirement set a high bar that requires a level of seriousness at the franchisor level and provides a level of transparency to the investor.

Today, franchising is a powerful force around the world with most developed countries experiencing growth in their franchise sector. How franchising will continue to evolve from this point forward is difficult to predict. What we do know is that it based on the history of franchising, it has definitely stood the test of time.

 

Sources include but are not limited to –
Micheal Seid – www.msaworldwide.com
            (both personal interview and written works found in About.com)
The International Franchise Association – http://www.franchise.org/
      The British Franchise Association Website – http://www.thebfa.org/

 

Click here to review The Franchising Methodology