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Area Representation

Multiunit franchise: Area representationThe North American Securities Administrators Association, Inc., a society of state regulators, wants franchisors to use this specific and technical term in the Franchise Disclosure Documents in lieu of the terms such as multiunit franchise, master franchisee, development agent or other terms that various chains have adopted.

NASAA describes three multiunit franchise functions – area developer, sub-franchisor and area representative.

An area developer signs an "area development agreement" specifying the number of franchise units it will commit to developing and owning in a given area.

Able to own its own franchises, a sub-franchisor has a territory in which it sells franchise agreements and supports franchisees. Its franchisees, called sub-franchisees, report to the sub-franchisor and provide ongoing fees to it. For example, a sub-franchisor arrangement could be made between sub-franchisor and franchisor for Canada, China or California in which the sub-franchisor is a sort of franchisor within the bounds of its territory, both selling and supporting its sub-franchisees in exchange for a portion of their royalty and fees.

On the other hand, an area representative recruits franchisees to enter an agreement directly with the franchisor in exchange for payments from the franchisee. Area representation describes an arrangement (see chart) in which an area representative sells and/or supports franchises in a territory with no contracted franchised units of its own. Rather, the franchisor contracts directly with the individual franchises that it sell and/or supports.

A franchise sales broker is different than an area representative in that an area representative pays its franchisor for the right to sell franchises for the franchisor. However, working outside a given franchise system, a franchise sales broker in contrast does not pay a franchise fee to a franchisor but rather receives a commission income from a franchisor in exchange for finding it a franchise buyer.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email