America’s Franchise Economy: How Franchising Mints Millionaires

What’s the surest route to wealth in today’s America? Launching an AI startup may seem alluring, yet most such ventures fail. Earning an advanced degree and grinding through a career as a corporate lawyer or financier once offered a dependable path to riches, but that route now looks threatened by AI. Perhaps you should consider instead the company that has plausibly minted more millionaires than any other in history: McDonald’s. The vast majority of its outlets are franchises, operated by independent firms that pay royalties to the brand — and frequently amass fortunes. If fast food doesn’t appeal, take heart: the franchising model pervades everything from hotels to Pilates studios.

Franchises may lack the social prestige of a Wall Street corner office, but they make many Americans wealthy. If reports are accurate, the nation has even recently produced its first billionaire franchisee. They also spur economic growth. More countries should strive to build a franchise economy — and America should safeguard its own from excessive regulation.

Why franchising is America’s wealth machine

Franchises have long been disparaged. As the model expanded during the 1970s and 1980s, economists dismissed it as little more than a cheap growth tactic in which franchisees supplied the capital to open new locations. Critics argue that franchisees are not “true” entrepreneurs in the mould of Elon Musk or Steve Jobs, but merely glorified store managers clinging to the illusion of being their own boss.

Yet franchising now constitutes a steadily increasing share of American business: there are nearly 850,000 franchise outlets, run by a quarter of a million business-owners. One in eight businesses in America with at least one employee is a franchise — roughly double the proportion seen in its closest international rivals, such as Japan and Germany.

The economics that make franchising work

Franchising succeeds because of fundamental economic principles: it efficiently aligns incentives and divides labour. It emerges when a business requires numerous employees spread across geographic areas; when monitoring staff would be difficult or costly; and when local market knowledge is crucial. Under such conditions, it makes sense to split responsibilities between a franchisor, who concentrates on the brand and product, and a franchisee, who adapts to local circumstances.

What the rest of the world can learn

The rest of the world can draw lessons from this model’s success. Franchises flourish partly due to the strengths of American capitalism. Robust intellectual-property rights shield franchise brands, while deep capital markets enable franchisees to borrow with ease.

But franchises have also benefited from sensible regulation. A wealth of public information exists about how franchise models operate. This is because franchisors must disclose how they earn money from franchisees, provide estimates of startup costs and ongoing fees, and reveal any legal issues they face. Many also disclose detailed financial performance data of existing franchisees. Franchising thrived after rules mandating transparent disclosure were introduced in 1979. Since 1986, the number of franchise outlets has nearly tripled.

The regulation debate: disclosure versus joint employment

More recent regulatory efforts have been less prudent. Critics contend that franchising exploits and sidesteps America’s weak labour protections, for instance by making unionisation difficult for workers. Such critics would designate franchisors as joint employers of franchisee workers.

Why the liability question matters

That would expose franchisors to enormous legal liability: they could, for example, be sued if a franchisee, who hires and pays staff, failed to pay overtime correctly. Such a change would make franchising far riskier and, by centralising the system, erode many of its benefits. It would ultimately prove counterproductive for workers, who gain from the abundant job opportunities franchises create, in industries largely untouched by AI.

Franchising may not be glamorous, but it is efficient. Best to keep it that way. ■

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