A franchise area developer’s role is to introduce the franchise into a larger region than just a standard franchise territory.
Franchise area developers agree to develop multiple units, so sometimes they are also referred to as multi-unit developers. These franchisees have to sign the regular franchisee agreement that all franchisees sign, but they also have to enter into a multi-unit development agreement. This means they are obliged to develop a set number of franchise locations during a set period of time in a specified market area.
For example, a franchise area developer may agree to open five franchise locations over a five year period in Vancouver. The area developer will pay a (usually non-refundable) development fee. These multi-unit development fees are often applied on a pro-rata basis to the franchise fee of each unit when those units’ franchise agreements are signed.
With our Vancouver example, let’s say a franchisor’s initial franchise fee is $60,000 and they require a deposit of $30,000 for each additional location. When this area developer signs the multi-unit development agreement, they’ll be required to sign their first franchise agreement and pay that initial fee along with the deposits.
- Initial franchise fee: $60,000 +
- Deposits for other locations (4 x $30,000): $120,000 =
- Total Payment: $180,000
As each additional location is developed and the franchise agreements are signed, the area developer pays the franchisor another $30,000 for each location.
- Initial franchise fee (per location): $60,000 –
- Pro-rata portion of development fee: $30,000 =
- Total payment per location: $30,000
Advantages to Area Development
Although most franchises tend to offer a mix of single-unit and multi-unit opportunities, some franchises prefer to offer only one or the other. There are some significant advantages to selling multi-unit contracts for both franchisee and franchisor.
Franchisees who develop an entire area with multiple units get to reap the rewards of being the only franchisee in that entire area for as long as their development agreements are good for. The exclusivity will return to the terms in each individual franchise agreement once the franchisee has developed all the units they’ve agreed to or once the area development agreement expires.
A multi-unit developer will usually also get a discount on their franchising fees for the later units they open. In our Vancouver example above, it showed that the franchisee would pay the same franchise fee for all locations, but that’s generally not the case in the real world. A multi-unit developer would be privy to some kind of discount. The first one or two units would require the full franchise fee, but units three and four would be subject to a discount on the fee and unit five might be subject to a further discount. (The discounts usually go in tiers.)
In addition to giving discounts on franchise fees, a franchisor might give an area developer a reduced royalty fee once they’ve opened a specified number of locations. Supporting multiple units owned by the same franchisee in one area is more cost effective than supporting multiple locations owned by different franchisees, so a franchisor is more likely to pass on additional savings to multi-unit owners.
For the franchisor, they get to better control market development. If they sell multiple units to one franchisee in an area, they no longer have to look for franchisees for that area. They can also better plan their support for that area, knowing exactly when units will be coming online.
Multi-unit owners tend to have access to better finances than their single-unit counterparts, meaning franchisors get to expand quicker than they would if they had to rely on single unit franchisees.
The risk, obviously, is that a franchisor might choose the wrong area developer. If the developer is unable to uphold their end of the bargain, the franchisor has taken an entire area off the table that could have been picked up by another franchisee. Franchisors will typically have safeguards and timelines built into their contracts to mitigate these risks.
For franchisees who have the money, being an area developer is a good way to have your own little franchise business empire in a given area. Regardless of whether you want to open a single unit or multiple units, sign up for a free FranNet franchise search and consultation for help finding the right franchise opportunity for you.