Multi-Unit Franchise Expansion: Area Developers, Area Representatives and a Word of Caution
.jpg)
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
representatives" as "Master Franchisors / Subfranchisors" and require that prior to offering, selling or engaging in the sale of a franchise that the area representative must disclose the prospective franchisee with the area representatives own FDD - in addition to the franchisor's FDD.
Master Franchise / Sub-Franchise Agreements. Master Franchise Agreements are more commonly utilized by franchisors in instances involving international expansion. Under a Master Franchise Agreement, the Master Franchisee is granted the affirmative right to not only sell franchises within a proscribed territory, but to also sign the franchise agreement. That is, the Franchisor is not a party to the franchise agreement between the Master Franchisee /Sub- Franchisor. Effectively, many of the franchisors rights are assigned to the Master Franchisee / Sub-Franchisor with regard to the designated territory.
Caution: Based on factors of litigation exposure and franchise system growth, in most instances the master franchise expansion model is inappropriate for domestic United States franchise expansion. Master franchise agreements and relationships require extensive disclosures within the franchisor's own FDD and the Master Franchisees separate FDD that must be disclosed to prospective franchisees. Master franchise relationships require dual disclosures to prospective franchisees.
When applied and implemented appropriately, each of the foregoing models may serve as a useful tool for franchise system growth and development.
I am a firm believer in the efficiencies and economies of scale that may result from operating multiple franchise units. Provided that you are a dedicated business person and that you are operating within a solid franchise system, the advantage and benefit of operating multiple franchise locations may be substantial. Of course, if things are not going well, owning and operating "multiple units" may serve to double or triple your difficulties. If you are a prospective franchisee considering the potential investment in a multi-unit franchise opportunity (i.e., where you obtain the "right and obligation" to develop more than one franchise unit with a proscribed geographic territory) you must carefully consider and evaluate the advantages, if any, that will result from any potential “mult-unit opportunity”.
