History of Franchising: Franchising in the Modern Age

A proven business model that has stood the test of time
Franchising really began to blossom 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 period.

But growing pains were becoming 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.

These misrepresentations 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

• An estimated 6,000 franchise companies operate in the U.S.
• 75 industries use franchising to distribute goods and services to consumers.
• Nearly 50% of all retail sales come through franchising.
• One in 12 businesses is a franchise.
• Average initial investment level for nearly 8 out of 10 franchises, excluding real estate, is less than $250,000.
• Nearly 86% of all franchises opened in 60 industries during the past 5 years are still under the same ownership.
• Over 300 franchises are sold every week. Or… every 8 minutes of a typical week a new franchised business is started.
• 750,000 franchised businesses in the U.S. generate almost $1 trillion in sales each year.
• In 2000, the median gross annual income, before taxes, of franchisees was in the $75,000 to $124,000 range, with over 30% of franchisees earning over $150,000 per year.

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