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Area Directorships

Area Directorships Attorneys

What is an “Area Directorship?”

An area directorship is like a master franchise relationship, in that it involves two franchise agreements. The differences between them are as follows:

  1. Master Franchise. In a master franchise relationship, the first franchise agreement (the “master franchise agreement”) is between the franchisor (the “master franchisor”) and the master franchisee. The second franchise agreement (the “subfranchise agreement”) is between the master franchisee and the subfranchisee.
  2. Area Directorship. In an area directorship, the first franchise agreement (the “area director agreement”) is between the franchisor and the area director franchisee (the “area director”). The second franchise agreement (a standard form of unit franchise agreement) is between the franchisor (not the area director) and the unit franchisee. The area director does not have a contractual relationship with the unit franchisee: only the franchisor has a contractual relationship with the unit franchisee.

What are the Advantages and Disadvantages of Area Directorships?

The advantages and disadvantages of area directorships are substantially the same as those associated with a master franchise relationship. The area director steps into the shoes of the franchisor, leaving the franchisor relatively free to allocate its resources to other objectives. The area director solicits and pre-qualifies prospective franchisees. The franchisor approves the franchisees, and enters into franchise agreements with them. The area director services the franchisees that are in its territory.

In addition, if the area director has significantly greater knowledge of the local market than the franchisor (for example, in international franchising), this “on the ground” expertise may be the key factor in deciding whether to offer area directorships.

Like master franchising, area directorships have disadvantages. The franchisor and the area director generally share the initial franchisee fees and royalties, as well as some of the other fees the franchisees may pay (e.g., transfer fees or renewal fees). As a result, the income from each franchised business is split two ways, rather than being retained in its entirety by the franchisor. In addition, because the area director is supervising the compliance of franchisees with their franchise agreements, the franchisor risks losing some measure of control over the operation of part of the franchise system.

How We Help.

If you are a reasonably well-established franchisor seeking to expand your business over a broad or unfamiliar area, and in particular if you are expanding internationally, area directorships may allow you to minimize your costs and maximize your growth.

At The Johnson Franchise Law Firm, we understand the complexities of area directorships, and the decisions that go into deciding whether to offer them. If you are considering taking your business to the next level through area directorships, contact The Johnson Franchise Law Firm today.

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