New York Franchise Law Blog : Franchise Lawyer & Attorney Charles N. Internicola, Providing National Representation of Franchisees and Franchisors

"Franchising" represents one of the most dominant and dynamic forms of distribution in the United States economy.  With, by many measures, franchise sales constituting more than 33% of all United States retail sales, the impact and significance of franchising is pervasive, has led and will continue to lead successful business owners and entrepreneurs to the following question:"is franchising right for my business?".    As with every important decision, there is no easy answer and a good decision requires a thorough assessment of your business, your management skills and the business systems and assets that you have established.  

Starting with the disclaimer and fact that "franchising is not right for every successful business, if you are interested in franchising your business, here are four questions that you must evaluate and answer.

Answering these questions are not easy and require serious consideration and thought as to the direction of your business and your commitment to creating a franchise system and infrastructure that will honestly and competently provide franchisees with the "opportunity" to duplicate your business business success. The prospect for franchisee profitability must be prominent in your assessment and evaluation.  

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Methods for achieving solid and sustainable levels of "multi-unit" franchise system growth and expansion are typically achieved through one or a combination of the following development models: (a) Area Development Agreements, (b) Area Representative Agreements, and (c) Master Franchise Agreements. Although there is no definitive formula as to the structure of each respective model, franchisors and their legal counsel must be aware of the core characteristics of each model and the associated FDD disclosure obligations.  Most significantly, franchisors need to proceed with caution and be aware that there is significant conflict between the Federal Franchise Rule and a multitude of state franchise laws as to the treatment of these development models.  For example, what constitutes and qualifies as an "Area Representative Relationship" under the Federal Franchise Rule, may constitute and be deemed a "Master Franchise Relationship" under state franchise laws.   

The following is a brief review of these development models and some factors that franchisors should consider:

• Area Development Agreements.  Area Development Agreements afford franchisees the obligation and right to establish and operate multiple franchise units within a proscribed territory. In its most common form, an Area Development Agreement affords a franchisee, in exchange for a "development fee" (which is separate and apart from a franchise fee), the obligation and right to develop a proscribed number of individual franchise units within a defined territory.  The Area Development Agreement will identify the development schedule and, in certain instances, provide the franchisee with a discount on initial franchise fees.  

Some Factors to Consider:  Area Development Agreements have become extremely common and serve as a useful tool in accommodating multi-unit sales to owner-operator franchisees. The Area Development Agreement serves as a supplement to the franchise agreement and as each franchise unit is developed the franchisee will be required to sign the franchisors current franchise agreement.  Area Development Agreements must be separately disclosed in your FDD.

• Area Representative Agreements.  Area Representative Agreements - unlike Area Development Agreements - do not relate to the area representatives "establishment and operation" of franchise units but, rather, to the area representatives obligation and right to sell franchises to third-parties within a proscribed territory.  In many instances an area representative serves a sales and training function on behalf of the franchisor.  Although area representatives are not granted the authority to sign franchise agreements, they are responsible for franchise system sales and training within the proscribed territory.  Area representatives receive compensation in the form of a percentage of the franchise fees and royalties generated from franchisees in the proscribed territory

Some Factors to Consider:  I do not reccomend Area Representative Agreements for the "start-up franchisor".  However foir well established franchise systems - with the necessary procedures and controls - Area Representative Agreements may serve as an important tool for system growth and, basically, outsourcing of administrative and managerial obligations.

Caution:  When dealing with Area Representative Agreements and relationships, franchisors must be aware that information about the area representative and the area representatives role and obligations must be extensively disclosed in the FDD , and (ii) Many states treat "area 

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