Area development arrangements are very different from master franchises and area directorships. The differences among them are as follows:
Under the development agreement, the franchisee agrees to develop additional outlets, within a prescribed territory, under an agreed-on schedule. The franchisee will generally pay a fee (the “area development fee”) for its territory. When the franchisee exercises its right to develop an additional outlet under the development agreement, it will usually pay the franchisor a new initial franchise fee. The franchisor may agree to use a part of the development fee to offset a part of the initial franchise fee. On the one hand, this setoff certainly helps the franchisee conserve its cash. On the other hand, the franchisor may have held the territory open for years, when it could have sold the territory to a third party and collected fees. Thus, the franchisor may want to structure its area development program without any offset, so that it is compensated for the losses it incurred from holding the territory open.
One advantage of an area development arrangement is that the franchisee already has (or is purchasing) a franchise. I.e., it is already a part (or has already committed to become a part) of the franchisor’s system. The franchisor does not have to recruit a third party, as it does when it seeks a master franchisee or an area director.
Another advantage is that the franchisor does not have to split revenues with a third party, as it does in a master franchise or area director relationship.
The primary disadvantage of an area development arrangement is that the franchisor must provide all of the services to be provided to the franchisee by itself, without the help of a third party, such as a master franchisee or an area director. When a franchisee’s proposed site needs an in-person inspection, the franchisor (not the master franchisee or area director) must inspect it. When a franchisee’s personnel need on-site training, the franchisor (not the master franchisee or area director) must provide it.
If you are a new or experienced franchisor seeking to expand your business over a broad area, retain maximum control, and realize the greatest revenue, an area development arrangement may help you achieve your objectives.
At The Johnson Franchise Law Firm, we understand the complexities of area development arrangements, and the decisions that go into deciding whether to offer them. If you are considering taking your business to the next level through area development, contact The Johnson Franchise Law Firm today.