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Area Developer

An Area Developer (AD) is a party who enters into a relationship with the franchisor that commits him to open more than one location. This relationship is different from a multi-unit franchise because the Area Developer commits and binds himself from the beginning to develop a specific area with multiple units for a defined period of time.

An Area Development agreement guarantees the right to develop a given area with single franchise units that are treated as franchises in the network and also obligates the franchisor to allow the AD to complete his franchise development schedule without the franchisor selling franchise units to others within the area territory. An AD fee is structured differently than a franchise fee.

Fees and the sharing structure between Area Developer, Franchisor and Franchise units vary from franchisor to franchisor. The initial franchise fee for the multiple locations are typically a reduced fee from a franchisor's standard fee.

To illustrate this, think of sandwich shop area developer. The AD would sign an area development agreement for a larger exclusive territory than a franchisee, say, Spokane, Washington. The agreement would bind the Area Developer to build a specific number of shops. Let's say for this example 10 sandwich shops in that territory within a five year period. If the party had only signed a franchise agreement, the franchisor would be free to sell sandwich shops to others around the much smaller exclusive territory of say, a three block radius. So, the Area Development agreement guarantees the AD the right to develop a much larger area.

However, if the Area Developer in this example fails to keep up his end of the bargain of launching 10 sandwich shops, the AD would lose his Area Development right and since he is in breach of the agreement, the franchisor in turn then has the right to sell franchises in the old AD territory, around the 7 shops that the AD may have launched in Spokane, Washington.

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External resources:

Sample of an Area Development Agreement, Maui Tacos

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Jim Coen's picture

Be careful of High Up Front Fees for an AD

The basic reasons for a franchisor to offer area development (AD) agreements are to put more capital in terms of time and money into the local area than the franchisor can afford to do on its own.

This approach puts a stakeholder in the marketplace working directly with the franchisees. I think it is important for AD to own at least one unit in the marketplace in addition to bringing in new franchisees.

AD agreements can be a very good way for franchises in competitive businesses to grow faster and establish their brand more effectively in local market. It has been a successful model in many areas of franchising, food, auto, health & fitness, etc. etc.

With all those benefits in consideration, I am very suspicious of franchisors that charge a high up front fee (or backend fee) to purchase a territory.

The best reason to offer Area Developers in the first place is get local capital invested into the local market. If huge fees are paid up front and siphoned out of the local area in the form of commissions how does that benefit future development of the territory?

Ill tell you it’s a recipe for disaster. I’ve seen some Area Development deals that are not much more than Ponzi schemes.

Jim Coen, Franchise Perfection, 877-469-3002, [email protected], www.franchiseperfetion.com