Multi-Unit Franchise Expansion: "Area Development Agreements" and "Area Representative Agreements"
When considering methods for expanding your franchise system, Franchisors need to be aware of the flexibility and growth that may be achieved through "Multi-unit Franchise Agreements". Multi-unit franchise agreements are typically comprised of (a) Area Development Agreements, (b) Area Representative Agreements, and (c) Master Franchise/Sub-Franchise Agreements.
The following is a brief review of each agreement:
Area Development Agreement. Area Development Agreements represent the most basic and widely used platform for achieving "multi-unit" Franchise expansion. Area Development Agreements supplement single-unit Franchise agreements and provide "franchisees" with the right and obligation to develop an agreed upon number of individual franchise units within a defined territory.
Area Representative Agreements. Area Representative Agreements relate to the designation of an "area developer" for a proscribed territory. Area developers do not establish or operate their own individual Franchise units but, rather, sell individual unit franchises to prospective franchisees with the area representatives proscribed territory. In many instances area representatives will, on behalf of the franchisor, train franchisees within the proscribed territory and monitor franchisee compliance.
Master Franchise/Sub-Franchise Agreements. Master Franchise Agreements are best suited to support a franchisors international expansion. Within a Master Franchise Agreement the "Master Franchisee" is granted the legal right to both sell Franchises and to approve and sign the Franchise Agreement. Essentially, as to the identified territory, the Master Franchisee "steps into the shoes" of the Franchisor and maintains a direct relationship with Franchisees. Master Franchisees are also, sometimes, referred to as sub-franchisors.
When evaluating multi-unit franchise agreements franchisors and their legal counsel need to be aware that there is a good deal of conflict between the various state franchise laws and the Federal Franchise Rule as to the definition of each multi-unit agreement and the FDD disclosure obligations imposed on Franchisors, Area Representations and Master Franchisees. Franchisors must evaluate and consider these "platforms for growth", however, when doing so proceed with caution.
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