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Franchise Development Creating turn-key Business Systems can Spur Growth

8/09/2010

by DAVID L. PRATT II

As the economy continues to sway in the land of the unknown and people begin to seek more entrepreneurial opportunities, many business owners have begun to explore the possibilities of franchising or turn-key operations as an alternative to direct expansion. A recent article in the Fort Worth Business Press focused on the incentives that some of the nation’s franchise brands are offering new franchisees in an attempt to entice expansion in the North Texas area. In contrast to the struggles of larger established franchise systems, many startup franchise brands appear to be realizing rapid success as new entrepreneurs are looking to be part of early-stage growth for popular new brands.

A prime example of such upstart franchise expansion can be seen in the Fort Worth-based Fuzzy’s Taco Shop restaurants. In fewer than five years, Fuzzy’s has expanded from a single location near Texas Christian University to 13 restaurants across Texas, with another eight locations slated to open during the next few months. Many more restaurants are planned in the coming years, including several locations outside of Texas. More impressively, the majority of this growth — spawned by Fuzzy’s management’s decision to adopt a franchise strategy for growth of the brand — has occurred during the economic recession of the past two years.

While restaurants and food establishments such as Fuzzy’s are perhaps the most commonly recognized category of franchises, other business models — such as retail clothing boutiques, residential and commercial moving companies and vehicle service shops — are well-situated for a franchise strategy. Indeed, virtually any business that generates a recurring stream of income from a large customer base has the potential of serving as the model for a turn-key operation.

All of this begs the question: What does it take to start and operate a successful franchise system? A complete answer takes far more words than will fit into this article, but there are two key considerations to keep in mind as you convert your business into a system that can be replicated. 

First and foremost, as with virtually all businesses, intellectual property must be protected. Indeed, franchise operations are incredibly dependent on consistency in the goods and services provided, the systems used to generate those goods and services, and the brands used to market those goods and services. As such, business names and logos will need trademark protection, devices and systems may need patent protection and written procedures may need copyright and trade secret protection. Accordingly, it is important to spend the time to determine how to achieve such consistency and how to protect the intellectual property that provides the foundation for your business system.

The second critical component of converting your business into a marketable turn-key operation is compliance with state and federal laws governing disclosures franchisors must make before selling franchises. As a starting point, the Federal Trade Commission’s “Franchise Rule” requires certain franchisors provide prospective franchisees with a Franchise Disclosure Document (formerly known as a Uniform Franchise Offering Circular) that provides 22 different categories of information ranging from the franchisor’s corporate structure and affiliates, to fees franchisees will be expected to pay, to historical and prospective financial performance data. 

In addition, 26 states have enacted “business opportunity laws” that impose additional and alternative disclosure requirements that must be satisfied before you may sell a franchise in that state, many of which include registration with, and payment of fees to, the state’s designated agency. Although state franchise laws generally require an abbreviated set of disclosures that resemble those required by the federal Franchise Rule, most of these laws also provide important rights and remedies for business opportunity investors, such as requiring security bonds to cover investor losses. Thus, it is critical that you have a thorough understanding of these and other franchise-related laws before launching your franchise operations.

Ultimately, if the explosive growth in the franchise industry after the 2000-2001 recession is an indicator, the time may be right to evaluate whether your business is well-situated for conversion into a turn-key system that can help you grow your business beyond simple expansion.

David L. Pratt II is an attorney with Fort Worth-based Decker, Jones,

McMackin, McClane, Hall & Bates P.C., where he focuses a large portion of his practice on franchise law. Pratt can be contacted at 817-336-2400 or dpratt@deckerjones.com.

Fort Worth Business Press

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