The typical franchise agreement arrangement between the franchisor and the franchisee is the granting of a single unit franchise whereby the franchisor grants to the franchisee the right to establish and operate a single franchise business at one location or within one designated territory. Other franchise arrangements include an Area Development Agreement (sometimes called a Multi-Unit Development Agreement) and a Master Franchise Agreement (sometimes called an Area Franchise Agreement). This blog addresses the Area Development Agreement.
Under the Area Development Agreement, the franchisor grants to the franchisee/developer the right to operate multiple franchised businesses within a designated geographic area or development territory. During the term of this agreement, the franchisor agrees to give the franchisee/developer the exclusive right to develop franchises within the development territory and to not grant franchises in the development territory to other franchisees (with a few exceptions). In the typical Area Development Agreement, there is an agreed upon number of franchises that the franchisee/developer agrees to open and operate and there is a schedule for opening the franchised businesses that the franchisee/developer must meet in order to keep its rights to the development territory.
Some franchisors see the granting of Area Development Agreements as a means for developing the franchise system more quickly. However, franchisors must be careful in identifying franchise candidates for an Area Development Agreement and making sure that these candidates have the financial ability and business skills to open and successfully operate multiple businesses.
Franchisees may see the Area Development Agreement as an attractive franchise model because they can avoid competition from other franchisees in the same geographic area and can instead fully develop the area themselves by opening multiple businesses. A single franchise business may not realize the type of income the franchisee is looking for from the investment in a franchise, and therefore, may prefer an opportunity that allows them to open multiple businesses. They may also have the benefit of economies of scale and may be able to share expenses between the multiple franchise businesses.
It is critical for the prospective franchisee considering signing an Area Development Agreement to choose the right franchise business and the right franchisor since they will be committed by contract to develop more than one unit even if the first franchise established is not as successful as they desire.
If you are a franchisor or franchisee considering one of these arrangements, the attorneys at Carter & Tani can assist you in preparing or reviewing an Area Development Agreement and the relevant disclosures in the Franchise Disclosure Document and addressing with you the advantages and disadvantages of such an arrangement.