The development of Franchise Business

Historians credit two different groups of people for the early stages of franchising. Some historians believe the pope is responsible for the first franchising system when, centuries ago, he was in charge of tax collection. Certain people were selected to serve as tax collectors and were given a geographical area over which they would collect the money. The collectors kept a sizeable portion of the money they collected and then gave the rest to the pope.

Other historians believe that franchising began in the Middle Ages, when local sovereigns or lords granted rights to local businessmen to hold markets or fairs, operate the local ferry, or hunt on sovereign’s land. Kings offered franchises for most commercial activities, ranging from building roads to brewing ale. Basically the king gave some businessman the right to a monopoly for a particular type of commercial activity. Regulations developed regarding these franchises, which are still part of European Common Law today. The actual term franchise comes from an old French word meaning privilege or freedom. I find it very interesting today that for many who have pursued the franchising dream, the word freedom has been the ultimate objective.

The concept of franchising as it is known today dates back to the 1840s in Germany, when major ale brewers gave the exclusive rights to sell their products to certain taverns. But the true guru of modern franchising is Isaac Singer, who in 1858 built the market for Singer sewing machines using franchising agreements similar to those found today.

Singer’s method of franchising, the product distribution method, was picked up by many manufacturers, including Coca-Cola, which expanded its product throughout the United States by shifting the burden of manufacturing, storing, and distributing its soda to local businesspeople through the process of selling them bottling rights. Car manufacturers found they could shift their distribution and selling costs to local businessmen who wanted to run car dealerships. Oil companies saw the light, too, and shifted their distribution and retail costs to local businessmen who ran convenience stores, gas stations, and car-repair shops.

After World War II, when millions of U.S. servicemen and women returned from the war needing jobs, the concept of business format franchising took hold. Many of these veterans decided they wanted to run their own businesses, but didn’t necessarily have the knowledge or capital to develop a business concept from scratch. In addition to the need for jobs, there was also a dramatic need for the rapid expansion of service industries, such as hotels, motels, and fast-food restaurants.

These two forces drove the creation of the type of franchising that dominates the sector today - business format franchising. Companies that developed an ideal business model for running one of these types of service businesses sold their business model to local businesspeople who wanted to run that business in their own area. Unfortunately, at that time not all franchise businesses were legitimate, and many people who found the franchise opportunities and bought the rights to franchise found out the person who sold it to them did nothing more than take their money and run.

Both the industry and the government stepped in to clean up the franchise industry to save the concept of franchising. The International Franchise Association, was founded in 1960 and has since worked to enhance the professionalism of the industry. The IFA is now the world’s largest clearinghouse and voice of franchising.

The U.S. Congress gave the Federal Trade Commission the responsibility for developing federal regulations. The FTC developed the rules behind the Uniform Franchise Offering Circular (UFOC) in 1979, which must be given to all businesspeople interested in buying a franchise before the company selling that franchise can accept any money.

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