In my Law & Entrepreneurship class, we have moved on from venture capital to franchising. We begin each section of the class with a case study (like business school, only we focus on contracts). This year, our franchising case study is the Wisconsin, fast-food juggernaut Culver's. In reading Culver's promotional materials and franchise agreement, I was intrigued by their requirement that all franchisees personally operate their stores.

Consider this from the Culver's web site:

Our owner/operator philosophy is one of the core elements to our success. We require each franchisee to personally manage and operate their restaurant in a full-time capacity. He/she cannot delegate management or operational responsibilities to another individual without the written consent of [Culver's] and must maintain a minimum of 50 percent ownership in the operating business entity.

The owner/operator requirement is a nod to Ray Kroc, who imposed the same requirement on early McDonald's franchisees. According to Kroc, an owner/operator had obvious advantages over the area developer. Most importantly, the owner/operator was heavily invested (both financial and human capital) in the success of a single outlet, thus creating intense incentives to succeed.

Contrast this to Krispy Kreme, which finances expansion through area development contracts. For what it's worth, my money is on Culver's.

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