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The History of the Franchise Business Model

"Now, I know what you're thinking. How the heck does a 52-year-old, over-the-hill milkshake machine salesman build a fast food empire with 16,000 restaurants, in 50 states, in five foreign countries, with an annual revenue in the neighborhood of $700 million? One word: persistence."

This quote from the 2016 movie The Founder is supposed to explain McDonald's meteoric rise from a one-shop operation to a multi-billion-dollar enterprise. While Ray Kroc (portrayed by Michael Keaton) was quick to attribute the company's growth to his own ambition, one could argue there was another, more significant force at play: franchising.

After Kroc teamed up with the McDonald brothers, he quickly turned to the franchising business model to help the company grow. Today, there are nearly 40,000 McDonald's restaurants around the world, 90 percent of which are owned by franchisees. And McDonald's makes up just a small sliver of the franchise industry. There are more than 750,000 franchise establishments representing several thousand brands in the United States alone, according to the International Franchise Association (IFA).

Franchising has a long history of helping brands expand their reach and revenue, as well as helping entrepreneurs open businesses of their own (and in a lot more industries than just restaurants). The guiding philosophy behind a successful franchise system is the symbiotic relationship between franchisors – who get to expand while limiting their financial commitments – and franchisees – who get to operate their own business with the support of an established brand.

If you're thinking of opening a franchise business, not only is it important to get a deep understanding of how franchising works, but it also helps to know how the franchise business model got to where it is today.

The History of the Franchise Business Model

The Start of the Modern Franchise Business

While similar structures have existed since the middle ages, the modern franchise business model started to take shape in the late-19th century when a burgeoning company started allowing independent investors to sell its products. Isaac Singer, the man who ran that company, is widely recognized as the pioneer of modern franchising. Singer's company sold sewing machines that could knock out hundreds more stitches per minute than any other device available at the time.

To extend his product’s reach, Singer partnered up with investors around the country, allowing them to sell his sewing machines in specific regions in exchange for an upfront licensing fee. But Singer didn't let his partners do whatever they wanted. He put rules in place to make sure they sold his sewing machines a certain way – like requiring licensees to teach their customers how to use the devices.

The Franchise Business Model Takes Off

Over the next century, the franchising model grew at a steady pace, led by manufacturing brands like General Motors and Coca-Cola. But it wasn't until after World War II that franchising really started to take off. Bolstered by a soaring economy and growing consumer demand, the franchise model took off in the United States in the 1950s and 1960s. It seemed like every industry wanted in on the trend – with restaurant, hotel, dry cleaning and rental car brands all adopting the franchise business model.

The influx of new brands brought additional attention to the franchise business model and, with it, additional oversight. In 1960, the IFA emerged as a leading organization for franchisors, franchisees and other interested parties to come together and establish best practices and a Code of Ethics to guide the franchise industry.

In the late 1970s, the Federal Trade Commission started to define stricter guidelines for the industry. The FTC enacted a law requiring brands to provide potential franchisees with a Franchise Disclosure Document before investing. In the document, each franchise brand was to provide detailed information about the company (history, officers, litigation issues, etc.) and details about franchising with the company.  

The Growth Potential of Franchise Businesses

Several of today's most prominent names in franchising sprang up during that time and the period shortly after. The UPS Store, Entrepreneur's fifth-highest ranked franchise brand, got its start as Mail Boxes Etc. in 1980 as a convenient alternative to the post office. In 2001, UPS acquired Mail Boxes Etc. to later form a network of more than 3,000 The UPS Store franchise locations across the United States.

Proving the impact that the franchise model can have on growth, the number of The UPS Store locations grew by 166 percent over the next decade and a half. In 2017, The UPS Store franchise system hit the 5,000-store count across North America. That momentum was still alive and well in 2019 when Entrepreneur Magazine named The UPS Store as one the top 25 fastest-growing franchise brands.

Common sense would tell you that the more owners in a system, the less control a franchise brand would have over the quality of its business operations. But franchise brands can prevail in the face of this logic by establishing a robust system for training and supporting franchise owners. For example, despite its growth, The UPS Store was named as the top franchise brand in the postal, printing, communications and business services category for the past 29 years and as a top-five overall brand for the past half-decade by Entrepreneur Magazine.  

Investing in a Proven Business Model

The franchise business has come a long way since its humble beginnings. In 2018, IFA projected that the Gross Domestic Product of the franchise sector would grow by 6.1 percent to top $450 billion. So, not only does franchising have a long history of success, the business model is getting even stronger – an excellent sign for anyone considering opening a franchise business.