If you think owning several franchises is a good idea, an area development agreement might be right for you. Unlike with single-unit franchises, an area development arrangement enables you to obtain the right to develop multiple locations within a designated territory. This offers the chance to build your business quickly and efficiently. However, it is important to consider the pros and cons before moving forward. An experienced franchise attorney can help you evaluate whether this is the best option for you.
Benefits of Area Development Rights
Buying a franchise is popular because it offers many advantages. However, area development agreements multiply those benefits as franchisees can leverage a successful brand in several locations. Among the best features of these arrangements are that they enable franchisees to take advantage of the following:
- Favorable market conditions. Area developers are typically granted an exclusive area in which to develop their franchises. This means that the developer can benefit from a good market by being the first one in a territory.
- Improved profitability. Multiple franchise locations allow a franchisee to quickly grow revenue. However, it also results in lower costs in many cases. Developers may be able to negotiate better deals with suppliers, share employees between locations, market all locations jointly and otherwise make their operations more efficient.
- Territory protections. Since it takes time to develop multiple locations, area development agreements often preclude other franchisees from opening units within the development area during the development period. While this protection only lasts until the last franchise is opened, that still gives the developer time to launch without worrying about another franchisee coming into the territory and competing with the developer.
Challenges of Area Development Arrangements
The same disadvantages of buying a franchise also apply to area development acquisitions. In addition, developers must be concerned about issues such as the following:
- Increased investment. Developing multiple locations requires a substantial investment of time and money. Developers must have access to sufficient ongoing financing to fund the development, launch each location and operate it until it is profitable.
- Need for multiple agreements. The area development franchise offering is codified in three documents – the Franchise Disclosure Document, the Franchise Agreement and the Area Development Agreement. In addition, a new franchise agreement is required for each location. An experienced attorney is essential to help ensure the developer properly evaluates the effect of various contract provisions. A knowledgeable lawyer can also assist in negotiating the agreements.
- Possible delays in the development schedule. Developers cannot develop all locations at once. Instead, the area development agreement will set forth how many locations are to be developed and the required time frames. However, developers must be careful that the schedule is realistic and there are protections in the event of unforeseen delays. A franchise attorney should negotiate for extensions allowing a developer to get additional time under appropriate circumstances.
- Limited territory protections. As noted above, the exclusive territory protection is only temporary. After that, the only territory protection is what is set forth in each franchise agreement signed in connection with each location which is typically a much smaller area (e.g., a 1-mile radius around each location). Before moving forward, developers should analyze whether the market can support additional franchises in the area and how it may impact revenue projections.
While an area development arrangement is not right for everyone, it can be very lucrative in the right situation. If you are considering the acquisition of area development rights, contact Lusthaus Law to learn how we can help you.