Franchise

Franchising is the practice of using another person's business model. The franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor. Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees.

Franchising has been around for many centuries but did not come to prominence until the 1930s in the United States, when the establishment of electricity, vehicles, and, in the 1950s, the Interstate Highway system helped propel modern franchising, most notably franchise-based food service establishments. According to the International Franchise Association approximately 4% of all businesses in the United States are franchises.

Franchising dates back to at least the 1850s; Isaac Singer, who made improvements to an existing model of a sewing machine, wanted to increase the distribution of his sewing machines. His effort, though unsuccessful in the long run, was among the first franchising efforts in the United States. A later example of franchising was John S. Pemberton's successful franchising of Coca-Cola.[1] Early American examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union[2], and exclusive agreements between automobile manufacturers and operators of local dealerships.[3] Earlier models of product franchising collected royalties or fees on a product basis and not on the gross sales of the business operations of the franchisees.

Modern franchising came to prominence with the rise of franchise-based food service establishments. This trend started in 1921 with A&W Root Beer.[4] Other quick service restaurants followed. White Castle, founded in 1921 in Wichita, Kansas, began franchising in 1923 introducing the hamburger bun and kitchen assembly line that would lead to the hamburger fast food chain concept. Maid-Rite, founded in 1926 in Muscatine, Iowa began franchising elsewhere in Iowa in 1927. In 1932, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise based on his successful Quincy, MassachusettsHoward Johnson restaurant founded in the late 1920s.[5][6] The idea was to let independent operators use the same name, food, supplies, logo and even building design in exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's started franchising motels.[7] The 1950s saw a boom of franchise chains in conjunction with the development of the U.S. interstate highway system.[8] Fast food restaurants, diners and motel chains exploded. In regard to contemporary franchise chains, McDonald's is arguably the most successful worldwide with more restaurant units than any other franchise network.

According to Franchising in the Economy, 1991-1993, a study done by the University of Louisville, franchising helped to lead America out of its economic downturn at the time.[9] Franchising is a unique business model that has encouraged the growth of franchised chain formula units because the franchisors collect royalties on the gross sales of these units and not on the profits. Conversely, when good jobs are lost in the economy, franchising picks up because potential franchisees are looking to buy jobs and to earn profits from the purchase of franchise rights. The manager of the United States Small Business Administration's Franchise Registry concludes that franchising there is continuing to grow and that franchising is growing in the national economy.[10]

Franchising is a business model used in more than 70 industries that generates more than $1 trillion in U.S. sales annually.[