The franchise was established in 1989 as an expansion franchise, and such notable NBA stars as Shaquille O'Neal, Penny Hardaway, Grant Hill, Tracy McGrady, Dwight Howard and Nikola Vucevic have played for the club throughout its history. As of 2021, the franchise has played in the NBA playoffs 16 times in 32 seasons, and twice went to the NBA Finals, in 1995 and 2009. Orlando has been the second most successful of the four expansion teams brought into the league in 1988 and 1989 in terms of winning percentage and playoff success, after the Miami Heat.
In September 1985, Orlando businessman Jim L. Hewitt approached Philadelphia 76ers general manager Pat Williams as they met in Texas on his idea of bringing an NBA team to Orlando. Intrigued by the potential of an Orlando-based NBA team, Williams became the front man of the investment group one year later, after he left the 76ers. On June 19, 1986, the two held a news conference to announce their intention of seeking an NBA franchise.
At the same time, Hewitt and Williams decided to hold a contest in the Orlando Sentinel newspaper to get names for their new franchise. Out of a total of 4,296 submitted entries, the names were subsequently narrowed to four, "Heat", "Tropics", "Juice", and "Magic". The last one, which had been submitted by 11 people, was picked after Williams brought his 7-year-old daughter Karyn to visit in Orlando. On July 27, 1986, it was announced that the committee chose the Magic to be the new name of the Orlando franchise in the NBA. The name "Magic" alludes to the area's biggest tourist attraction and economic engine Walt Disney World, along with its Magic Kingdom. Hewitt added that "You look at all the aspects of Central Florida, and you find it really is an exciting place, a magical place."
Many, including Williams himself at first, thought that Miami or Tampa were better locations in Florida for a franchise, given Orlando was a small town lacking a major airport and a suitable arena. Hewitt brought investors such as real estate developer William DuPont, Orlando Renegades owner Don Dizney, and Southern Fruit Citrus owners Jim and Steve Caruso, and talked the Orlando city officials into approving an arena project. Meanwhile, Williams gave presentations to NBA commissioner David Stern and the owners of the other teams of the league that the town was viable.
In April, the franchise committee recommended that Minnesota and Charlotte definitely warranted their own NBA teams as part of the planned expansion. The franchise committee decision put the Orlando team in doubt, when they advised that the state of Florida should only be allocated one team as part of the three-team expansion. This feedback put the planned Orlando franchise up against the planned Florida Heat team, that were eventually named Miami Heat. When both Miami and Orlando ownership groups made successful pitches, the expansion committee decided to expand by four teams, allowing both to have a franchise.
The Magic became the first-ever major-league professional sports franchise in the Orlando area, following an expansion fee of reportedly $32.5 million. They were one of the four new expansion franchises awarded by the NBA in 1987 along with the Charlotte Hornets, Miami Heat and Minnesota Timberwolves. The Magic hired Matt Guokas as the team's first coach, who helped the Magic select 12 players in the NBA Expansion Draft on June 15, 1989. On June 27, 1989, the Magic chose Nick Anderson with the 11th pick in the first round, who became the first draft pick of the franchise.