What a Ride!

Law and Order

Franchising's remarkable growth and success over the past 30 years owes much to federal and state franchise laws and regulations--and the enlightened individuals who enforce them. Many folks forget that, by the late 1960s and '70s, the words franchise and fraud had almost become synonymous. What happened was simple: As franchising exploded onto the scene in the '50s and '60s, story after story appeared in newspapers and magazines about how franchisors and franchisees were growing wealthy in this burgeoning arena. That's when the criminal community, including organized crime, jumped in. Tens of thousands of people nationwide collectively lost hundreds of millions of dollars through criminal franchise enterprises--enterprises that, using slick brochures and outright fraud, sold phantom, nonexistent franchises to hapless victims.

Fifteen states and the federal government fought back, enacting franchise registration and disclosure laws and embarking on an aggressive law enforcement campaign to eradicate fraud in the franchise arena. And you know what? It worked. Due to the diligent enforcement of these laws by federal and state regulators--who, at the same time, grew more understanding of legitimate franchisors' needs and wants--there hasn't been a major franchise scandal in this country in decades. In fact, during his time as New York's attorney general, current governor Eliot Spitzer observed how relatively clean the franchise marketplace has been. "There has been a notable absence of scandal," he said. "When we look at the franchise market, we say, remarkably, [that] we have a great market that is healthy, growing [and] generating jobs, investment and confidence on the part of all involved."

So, yes, franchising has had quite a run over the past 30 years. It's seen meteoric growth, consolidation of both franchisors and franchisees, the maturation of relationships between them and the continually growing public demand for franchising's products and services. Now, rarely a day goes by that any of us does not encounter or frequent a franchise establishment.

And what does the future hold for franchising? Seemingly, continued unbridled growth, further dramatic expansion into foreign markets and sharply increased numbers of U.S.-based franchise networks. "The past is prologue," observes IFA president Matthew Shay. "In the three-year run-up to Entrepreneur's 30th anniversary, nearly 900 new concepts began franchising in the United States. Today, prospective franchisees have a wide range of franchise opportunities to select from in over 100 lines of business, offering business formats of all shapes and sizes." State franchise regulators concur, observing that in the past year alone they witnessed a 20 percent spike in initial franchise registration applications submitted to their offices.

Pretty good for an industry that started with a Kentucky colonel (Harland Sanders) charging his first franchisees a nickel-a-chicken royalty; a beverage Mixmaster salesman (Ray Kroc) who just had to know why the McDonald brothers were ordering more of his machines than anyone; and a beleaguered father of young children (Kemmons Wilson) who, after finding no family-friendly hotels to stay in while on vacation, started the Holiday Inn chain.

David J. Kaufmann is senior partner of Kaufmann, Feiner, Yamin, Gildin & Robbins LLP in New York City, author of the New York Franchise Act, a member of the governing committee of the American Bar Association Franchise Forum and a franchise columnist for the New York Law Journal.

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This article was originally published in the May 2007 print edition of Entrepreneur with the headline: What a Ride!.

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