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A brief history of franchise law

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On Behalf of Lanard and Associates | Aug 4, 2016 | Firm News

I bet you are wondering why a sewing machine is the cover image of an article on the history of franchise law. Keep reading to learn more.  Over the centuries, people developed the concept of franchising to expand businesses in a way that could spread risk among the owner (the franchisor) and a set of partners (franchisees). Franchisors can develop their company and seek new markets, while franchisees can enjoy some of the liberties of managing a smaller portion of a larger business.

While the term “franchise” may bring modern images of neon signs and greasy burgers, franchising has a much longer past that includes taxes, sewing machines and other surprising enterprises.

Early franchising concepts

The concept of franchising, where a franchisor gives a franchisee a territory, and in return, shares the profits of the franchisee’s work, is not a new one. While the term “franchise” is relatively modern, the foundational ideas were not in sales but early feudalism. In European countries, England most notably, the Crown owned the surrounding lands and would grant land rights in exchange for fees and profits.

Managing people to work feudal lands was not the only way European countries used a concept similar to franchising. The same idea was used for tax collecting. Noblemen and other officials could set tolls and collect taxes and give a portion of the proceeds to the Crown.

The beginning of franchise growth

Today’s franchises are closer to some of the first attempts America saw in the 19th century. As technology advanced, so did the ways Americans were doing business.

In the 1850s, Isaac Singer made significant design changes to the sewing machine, making it more practical for home use. As the company grew and utilized mass production, his son, Albert Singer, utilized the franchise concept by having managers run local stores to sell sewing machines.

Albert Singer’s business concept was the first franchise in the United States. Rather than being limited to one location or trying to manage several locations personally, a franchisor could find others willing to invest in the business. Likewise, someone with an entrepreneurial spirit could obtain some business independence while using the franchisor’s established business ideas and practices.

The progression of the franchise concept

While the Singer sewing machine franchise was not as successful as some of its modern counterparts, it helped shift the model for running a business. Despite varying results in early franchising attempts, the idea of the franchise eventually became a more popular way to increase profit with less risk than some traditional business models.

Not long after Albert Singer used the franchise concept to market sewing machines, Frederick Henry Harvey started developing the franchise idea for Harvey House restaurants, with the first opening in 1876. Harvey established for his restaurants some of the same approaches to franchises that franchisors continue to use today, including regular checks to ensure quality standards.

Post-WWI franchises

With the advancement of the car, the United States started to see more franchises centered around convenient dining. The early 1900s saw franchise-based restaurants like Howard Johnson’s, White Castle, A&W Root Beer and Kentucky Fried Chicken take off.

These franchises allowed franchisors to expand their business and maintain consistency within their brand. Rather than directly overseeing every store, franchisees could manage the day-to-day operations, allowing franchisors to develop and expand the business.

Discovering the need for change

As the franchise became a more popular concept, some franchisors began to lose sight of what made the franchise model successful in the first place. The advantage for a franchisee is having the support to establish sales while maintaining brand standards. In some cases, franchisors became more focused on selling franchises than supporting the franchisees who were struggling to make the business profitable.

In an effort to sell more franchises, franchisors started focusing on inflated promises and gimmicks to attract more franchisees. The franchise world became a complex web of success, failure, lies and truth. While some franchises continued to market a bona fide business, others took advantage of those who thought they could make easy money with a franchise that turned out to be a fiction.

Developing regulations for franchises

When franchise standards began to deteriorate, and franchisees lost the support they needed from their franchisors, some operations faltered while others recognized the need to make a change. In 1968, California led the way with regulations requiring that franchisors provide disclosure documents to prospective franchisees.

It would take more than a decade for similar regulations to reach a federal level and offer protections for franchisees across the country. Ultimately, the Federal Trade Commission (FTC) mandated that franchisors needed to disclose certain aspects of the franchise opportunity, including:

  • Initial costs and investments
  • Legal obligations
  • Ongoing fees and expenses
  • Financing arrangements
  • Territory
  • Trademarks

Initially, this document was known as the Uniform Franchise Offering Circular (UFOC) and, in 2008 became known as a Uniform Franchise Disclosure Document. Today the Franchise Disclosure Document (FDD) is still an essential part of purchasing and getting involved in a franchise. These disclosures were part of the foundation of franchise law since they helped franchisees understand the costs and other obligations that come with purchasing a franchise. Without these protections, franchisors would often gloss over these important details, leaving franchisees without the information and support they needed to be successful.

Often franchisors will not negotiate the terms of a franchise agreement, but it is still important for franchisees to seek an experienced franchise attorney to learn more about the disclosures and the contract that they will be signing. A lawyer can help prospective franchisees understand the disclosures and what is typical in a specific situation.

Getting started with your franchise

Purchasing a franchise can be an exciting shift that allows you some of the independence of owning a business without having to start from scratch. A franchise gives you the safety of an established product with support from a franchisor.

As you consider whether a franchise is the right move for you, it is important to think about both the time and money you will need to invest. Often, franchise contracts run for 10 years or more and may be challenging to sell. You will also need a significant amount of capital in which to invest to get the franchise up and running.

Before you decide which franchise is right for you, you should talk to an experienced franchise attorney. Often general business attorneys do not work with franchises and are not familiar with the nuances that come with franchise law. A franchisee lawyer can help you understand the disclosures and the agreements you will be signing so you can learn what to watch for in these important contracts.