Early franchising dates back to the mid 1850’s when the sewing machine was founded by Isaac Singer. He established the model by allowing door to door salesmen the ability to sell his sewing machine to the end user. The sales person would receive a percentage of the profits from the machine sale and Singer would take a portion, creating the first franchise royalty.
Coca Cola created territory rights for its nationwide distributorship in the late 1890’s adding another element to Singer’s business model. The 20th century really saw the formation of the franchise model expand when the automobile industry began to franchise. General Motors and Ford allowed independent car dealership owners to sell their cars which helped struggling retail outlets with supply and a better-quality automobile.
The franchising model began to explode in the 1950’s and 60’s when KFC, McDonalds, and Burger King were established. Their growth was also made possible by national advertising through television. In the 1970’s, in response to the massive growth and the unscrupulous franchise activity by some emerging brands, the Federal Trade Commission (FTC) began investigating franchise offerings after complaints of fraud. Companies would make franchise offerings, collect the initial investment, and close up shop, seemingly overnight, leaving many investors out of their investment and feeling duped. As a result of the early nefarious activity, the FTC began to regulate the franchise industry. In 1978 the FTC officially defined what a franchise is and what is being offered under the Uniform Franchise Offering Circular (UFOC). This is also commonly referred to as the “franchise rule”. Under the Franchise Rule the FTC defined a franchise as any continuing commercial relationship or arrangement, in which the terms if the offer or contract specify, or the franchise seller promises or represents in writing that:
(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark;
(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation; and
(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a requirement payment or commits to make a required payment to the franchisor or its affiliate.”
In 2007 the FTC amended the UFOC and franchise rule and adopted what is now known as the Franchise Disclosure Document (FDD). The FDD today now lists 23 items that illustrate what the company is offering, its history, investment costs, and many more valuable pieces of information to help the potential franchisee make an informed investment decision. In addition to being regulated by the FTC on the national level, each franchisor must register its FDD at the state level in order to offer the franchise opportunity in a particular region, thus creating more regulation with the intent to protect the public against fraudulent activity.
When making a major decision like investing in a franchise, we always recommend having a franchise attorney review the FDD and Franchise Agreement before signing the agreement. Contact us today to learn more about the attorneys we are affiliated with and how they can help you.