Imagine you are an area developer or multi-unit operator, and you have found an ideal territory where there is a demand and/or tremendous potential for your franchise. Before negotiating the area development agreement with the franchisor, there are some details you should discuss with your attorney.
Area development agreements grant a franchisee (or multi-unit operator) a protected territory in which to open a predetermined number of franchises pursuant to a specified time period. In recent years, a smaller form of document known as a multi-unit addendum has been added to a franchise agreement to avoid the need to include a comprehensive area development agreement.
These documents lay out finite areas and development schedules, yet many franchisees mistakenly believe the protections will last forever. Let’s review some common missteps and how a franchise lawyer can help a multi-unit operator avoid them.
You Have Limited Time To Open The Units
Time is always a key factor outlined in area development agreements. Franchisees have a certain amount of time to open their units or risk defaulting on the agreement. For example, you may be permitted to open three units, one-per-year for three years. The length of time will vary by franchise system and the number of units planned for your area.
Since it takes time to develop multiple locations, these agreements often preclude other franchisees from opening units within the same area during the development period.
Know The Competition – Inside and Outside the Franchise
Attracting and retaining customers and clients is a challenge compounded by competing with other brands. A gym franchise, for example, will compete with the martial arts franchise or even another gym brand for someone looking to exercise.
But what protects you from competition within your franchise system? You certainly will not want to have to compete with another local franchisee .
This exact scenario should be addressed in the area development agreement or multi-unit addendum. The language should stipulate that additional units or new franchisees within the system cannot open locations within a certain radius of your development area. The distance will vary depending on the type of franchise, the local population and several other market factors.
Different Agreements and Changes to Territory Protections
Once the schedule has been completed and the locations are open, the initial protection ends and is replaced by the territorial protection granted to each location in the franchise agreements. For example, if you have development rights to open three gyms in Brooklyn, once you have opened all three (or if you do not meet the development schedule), the rights to develop in the borough end along with the development area protections.
The franchisor may then open or permit another franchisee to open a location in Brooklyn, subject only to any territory protection provided to you in each of the franchise agreements signed in connection with each location. Typically, franchised units receive much smaller protected areas than are provided in connection with development rights (such as a one-mile radius around each location).
From there, it is up to you to continue building the clientele and membership and establishing a positive reputation for your units.
Even the most sophisticated multi-unit operator runs the risk of misinterpreting an area development agreement. Always consult a lawyer before entering into a franchise agreement. Contact Lusthaus Law to ensure your franchise territory rights are protected.