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There are many different forms of franchising. The type of agreement a franchisor shares with their franchisee will impact how the business relationship works and each party’s responsibilities. The simplest form of franchising involves single-unit franchising agreements. A single-unit agreement allows a franchisee to open and operate one unit of business. An area development agreement, however, is a form of multi-unit franchising. It is a more advanced level of franchising and can allow a franchisor to extend their brand’s reach further. This article will explain what area development agreements are in franchising.
What is Franchising?
The most basic form of franchise agreement involves a franchisor allowing a franchisee to open and operate a single business under the franchise name. The franchisee owns their business and uses the franchisor’s branding and operating systems. Franchising enables business owners to expand their brand without responsibility for the day-to-day operations of the new units.
What is an Area Development Agreement?
Area development agreements are an advanced form of franchise agreement. This agreement allows franchisees to open and operate a particular number of businesses within a defined territory. The franchisee will pay franchise fees for each new business. This is a type of multi-unit agreement.
A benefit of area development agreements is that it can take a franchisor less time to build an extensive franchise network than if they relied on single-unit arrangements. A franchisee will open multiple units and focus on developing their exclusive area, allowing franchisors to expand their brand quicker than single-unit agreements.
These agreements can also be less costly for franchisors. For example, you would train and support ten franchisees to open ten units using single-unit contracts. However, an area developer can launch ten units, and you will only need to train and support one franchisee.
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Considerations Before Implementing Area Development Agreements
1. Franchisee Experience
Area development agreements are more appropriate for those with prior experience as a franchisee. Many entrepreneurs who aspire to be franchisees do not have previous industry or management experience. Franchisors are often happy to accept such candidates if they demonstrate a suitable level of transferable skills and a willingness to learn. The franchising model facilitates such career changes as franchisors must provide initial training. The initial training prepares franchisees for their roles by teaching them the necessary specialist skills and industry know-how.
However, area development agreements can be inappropriate for inexperienced franchisees. Multi-unit agreements carry an advanced level of responsibility. Area developers, in particular, will be responsible for managing all of their units, and they can have a more significant influence over brand perception because they operate more businesses.
A franchisor must conduct due diligence during franchisee recruitment to ensure candidates are suitable for the role. It is important to consider that somebody new to the franchising industry is unlikely to have the skills necessary to assume the role of an area developer. A single-unit agreement is likely to be more appropriate. Notably, this is not a steadfast rule and can depend on the particular candidate. The type of franchise agreement you establish with your franchisees is your choice. Still, franchisees must be able to take on the necessary responsibilities and maintain professionalism at all times.
2. Territorial Exclusivity
Territorial exclusivity is a crucial aspect of area development agreements. Not all franchise agreements come with an exclusive territory, but this is an essential aspect for area developers.
3. Industry and Market Demand
Whether area development agreements are appropriate for your franchised business can depend on your industry. Multi-unit franchising also suits some industries better than others. Conduct thorough market research to determine whether there is a demand for multiple units in a particular area.
This handbook covers all the essential topics you need to know about franchising your business.
Key Takeaways
Area development agreements allow franchisees to open and operate a particular number of units within a defined territory. The benefits of area development agreements for franchisors are as follows:
- you can save time and money as there will be fewer franchisees to train and support; and
- they can enable quicker brand expansion.
You should consider several aspects before implementing area development agreements in your franchise network and recruiting area developer franchisees. These include:
- whether multi-unit franchising is appropriate for your business;
- whether there is sufficient demand for multiple units in a particular area;
- the boundaries of a franchisee’s exclusive territory; and
- whether a prospective franchisee has the appropriate experience and skills to become an area developer.
If you need help drafting an area development agreement or advice about your franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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