Experienced franchisees or franchisee groups who have found success in a given market may be ready to expand their presence. But becoming a multi-unit operator (aka “area developer”) does not happen overnight. Launching and operating multiple units requires organization and commitments of time, effort and finances. Collaborate with a franchise lawyer to create an area development agreement and strategy that can:
- Take advantage of market conditions.
- Increase revenue.
- Improve efficiencies or reduce costs by running multiple local businesses.
- Prevent conflicts with the franchisor and other franchisees.
- Leverage the developer’s status as a multi-unit operator to negotiate contract provisions with the franchisor.
Area development can be very lucrative and strengthen a franchisee’s portfolio and reputation, but it can also carry significant risks. Lusthaus Law has the necessary experience to help protect the rights of franchisees, navigate the legal compliance issues, and negotiate the agreements needed to implement a successful area development agreement.
Acquiring The Rights
Area developers aim to secure a protected territory in which to open a predetermined number of franchises pursuant to a specified time period. This requires the developer/franchisee to purchase the rights to open multiple locations from the franchisor through an area development agreement.
The development fee and initial franchise fee for each location are usually non-refundable, but franchisors may offer more favorable rates when the franchisee agrees in advance to develop more than one unit. Consult a franchise lawyer before entering into any transaction.
The clock is always ticking for area developers, as franchisees have a certain window of time to open their units or risk defaulting on the area development agreement.
For example, you may be permitted to open five units and be required to open one-per-year for five years. The length of time will vary by franchise system and the number of units planned for your area.
Area Development Agreement: Competition
Since it takes time to launch and establish multiple locations, area development agreements should provide the developer with exclusivity which operates to preclude other franchisees from opening units within the same area during the development period. This prevents competition from within the franchise system.
Limits on Territorial Protections
Once the schedule has been completed and the locations are open, any exclusive protection for the area ends and is replaced by the territorial protection, if any, granted to each franchise location. The area development agreement expires and the franchisor may then open or permit other franchisees to open locations within the area.
Area Development Agreements
When acquiring rights, the prospect will be provided with a Franchise Disclosure Document
(FDD) that will include both the franchise offering for the acquisition and operation of the first franchise as well as the multi-unit offering. The franchise agreement contained in the FDD will be in the form required for the first location. A new form of franchise agreement will be required for each subsequent location.
The FDD will also contain the area development agreement, which will provide for the developer’s rights to open additional units pursuant to a specific schedule within a particular territory. Key provisions of the area development agreement include:
- Territory definition.
- Any exclusivity rights and exceptions.
- Development schedule, including the number of proposed locations and time frames.
- Termination provisions.
Legal representation is essential when reviewing the area development agreement and the franchise agreement. Lusthaus Law has worked with franchise clients on both sides of area development to negotiate and draft documents and protect and advocate for clients’ business interests. Contact us for a consultation.
CONTACT LUSTHAUS LAW