Area Development Franchise Agreements

Stephen S. Raines
President, National Franchise Associates
Atlanta-based Specialists in Franchise Consulting & Franchise Development Success

In my over three decades of experience as a franchise consultant, I am often asked “What makes one company succeed in franchising while another doesn’t?”

Rarely is there a single reason for success or failure in franchising.  Here, I will examine some of the many factors that can help you create a successful franchise program.

Last month, I addressed the different types of franchises, each requiring its own Franchise Agreement.

There are three main types:

  1. Individual Franchise Agreements
  2. Area Development Franchise Agreements
  3. Master Franchise Agreements

In February, I reviewed the pros and cons of the Individual Franchise Agreement.

With an Area Development Franchise Agreement, you and the area developer negotiate a territory, the number of franchise operations to be opened and a timetable for these openings.  If the area franchisee does not meet the terms of the Franchise Agreement, the territory reverts back to the Franchisor.

The pros of an Area Development Franchise Agreement include:

  • Targeting area developers can be a faster franchise growth strategy.
  • The candidates with the resources to open multiple locations often are more savvy business people.
  • The Area Development Franchise Agreement requires less time, effort and funds to sell, train and service franchises.
  • Operating multiple units can be more cost-effective through economies of scale.
  • At the outset of a franchise program, an Area Development Franchise Agreement can be a valuable supplement to the Individual Franchise Agreement.

The cons of an Area Development Franchise Agreement include:

  • Because the requirements are higher, there are fewer qualified candidates.
  • There is more heated competition for qualified Area Developers.
  • A Franchisor with less involvement and control over the franchises risks the dilution of the brand and operating system.
  • At the outset of a franchise program, the Franchisor may be weaker than the Area Developer, making it difficult to enforce your Franchise Agreement.
  • An Area Development Franchise Agreement may not work in certain industries or franchise strategies.
  • Often, owner-operated franchises are more profitable.  An Area Development Franchise Agreement eliminates the owner/operator.

You must carefully explore which type of Franchise Agreement(s) best meets your goals for franchising your business.

To be continued…