Some franchisees want to develop several franchises in a region as a way to increase revenue and profits quickly. Having multiple local businesses can reduce costs, improve efficiency, and provide some temporary protection from competition. Selling multiple franchises to a single franchisee (or area developer) also offers franchisors various financial benefits as well as fewer franchisees to manage. In order to effectuate this type of arrangement, an Area Development Agreement is needed.
While these deals can be very lucrative for both sides, there are many issues that need to be addressed which can affect the success of the venture. Importantly, in an area development franchise model, the provisions must be codified in three documents – the Franchise Disclosure Document, the Franchise Agreement, and the Area Development Agreement. An experienced franchise attorney is essential to draft and negotiate the terms that will govern the parties’ relationship and represent their best interests. Among the most important provisions for developers are these three:
- Development schedule. The parties must agree on how many locations are to be developed and the time frames. The developers have to be careful that the schedule is realistic. Further, there should be protections for the developer in the event of unforeseen delays. Provisions for extensions can be negotiated by an attorney allowing a developer to get additional time under appropriate circumstances.
- Territory protections. The development agreement typically grants the developer an exclusive area in which to develop a specified number of franchised businesses. This is an important benefit as it precludes other developers from opening units within the development area during the development period. However, this protection is only temporary. It lasts until the last location is opened. After that, the only territory protection is what is set forth in the 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 must consider how the more limited territory protection will affect each location. An attorney can explain the provisions and advise on how they may impact the developer’s business.
- Consistency in franchise agreements for each location. As noted above, area development acquisitions require several agreements. When the parties first contract, they will sign the area development agreement as well as a franchise agreement for the first location. Thereafter, there will be a separate franchise agreement for each location which must be separately negotiated. An experienced franchise attorney is invaluable in representing the developer’s interests, particularly when it comes to maintaining consistency in the material terms of the agreement. At a minimum, developers should strive to keep royalties and fees the same for all agreements otherwise they risk unexpected increases or other changes for subsequent locations.
Acquiring area development rights involve complex transactions. Further, they require a substantial investment by developers, and they cannot afford to make costly mistakes. If you are considering an area development acquisition, contact us to learn how we can help you.