What Is a Franchise Area Developer?
While a franchisee may, over time, acquire multiple locations, an area developer (more properly called a multi-unit developer) enters into the franchise relationship with a plan to develop multiple locations.
In addition to the franchise agreement that each franchisee signs, a multi-unit developer enters into a multi-unit development agreement with the franchisor that gives them the right and the obligation to develop a set number of franchises during a set period of time in a defined market area.
For example, a multi-unit development may agree to open five locations over the next three years in Miami-Dade County, Florida. To obtain those rights, the multi-unit franchisee will usually pay a development fee that is generally non-refundable and is frequently applied on a pro-rata (or proportional) basis to the unit franchise fee owed as each location’s franchise agreement is signed.
How the Costs Break Down
Assume a franchisor’s initial franchise fee is $30,000 and they require a $15,000 deposit for each additional franchise the multi-unit franchisee agrees to open. Also, assume that the multi-unit franchisee agrees to open five locations. Upon signing the multi-unit development agreement, the multi-unit developer will generally also sign their first franchise agreement and pay $90,000.00 to the franchisor.
Initial Franchise Fee: $30,000.00
Development Fee (or Deposit) (4 x $15,000) $60,000.00
Total Payment $90,000.00
As each of the additional franchise agreements is signed, the multi-unit developer will pay to the franchisor $15,000.00.
Initial Franchise Fee $30,000.00
Less: pro-rata portion of Development Fee $15,000.00
Total Payment $15,000.00
The Advantages of Franchise Area Development
Offering exclusively multi-unit development instead of single-unit opportunities is rarely the proper path for franchisors. Still, there are significant advantages for franchisors and franchisees when they enter a multi-unit development agreement:
- Multi-unit developers benefit by locking in a market area that generally provides them with the right to be the exclusive franchisee during the term of the development agreement. Once the multi-unit developer has developed all of the franchises in the agreement, or when the terms of the development agreement expire, the market exclusivity generally returns to the terms included in each individual franchise agreement.
- The multi-unit developer also generally does not pay the same initial franchise fee as the single unit franchisee. The example above shows that the same franchisee fee is paid for each location. In the real world, the franchise fee for subsequent locations would be reduced, while the developer pays the same initial fee for its first location in tiers. For example, the initial fee for franchises two through five might be reduced to $25,000 and the locations above 5 might be reduced again to $20,000.00.
- An additional benefit some franchisors provide to multi-unit developers may include a reduced royalty once a developer has opened a certain number of locations. This lowering of fees makes sense, as the cost of supporting a multi-unit franchisee is generally lower on a per-unit basis. The multi-unit developer has a different cost structure than a single unit franchisee, and they generally have a back-of-house infrastructure that the franchisor can leverage to reduce its support costs.
Franchisors are able to have a better handle on market development because of the contractual obligations of the multi-unit developer. This allows them to better plan market support, advertising, supply chain, etc. Multi-unit developers are also generally more sophisticated and better financed than single-unit operators, giving franchisors opportunities not as easily available from single-unit franchisees. This is why more than 50 percent of franchised locations are currently owned by franchisees who own more than one location.
Risks of Multi-Unit Development
Of course, the greatest risk to a franchisor entering into multi-unit development agreements is the selection of the wrong developer. In addition to taking a market off the table for a period of time for other development, and the risk that the developer will not meet their development timeline, you have additional problems if the developer does not operate their multiple locations to brand standards. With today’s vetting protocols, this risk is minor and manageable. Properly constructed development agreements include specific dates for each unit's development and cross-default provisions meant to protect the franchisor.
Classes of Franchise Area Developments
A mistake often made by franchisors in marketing their franchise opportunity is to assume their offering will be active to both single-unit franchisees and multi-unit developers. If they modify their offering, it generally only is a reduction in the initial franchise fee.
Another mistake is assuming all classes of multi-unit franchisees are looking at their opportunity for the same reason. Proper multi-unit franchise offerings are developed in a way that is attractive to multi-unit developers in general and also understand that strategic franchisees, private equity franchisees and franchisees that are simply looking to operate multiple locations are different, and have different needs and reasons for considering entering into the relationship. The offering and the marketing of the offering, therefore, should be intelligently developed to maximize the opportunity to be attractive to each class of multi-unit developer.
Examples of Franchise Area Developers
You won't have a problem identifying some of the most popular types of these franchises. They include fast food restaurants such as Subway and Sonic, to beauty spas and stores. Other area franchisers include accounting and tax services, fitness centers, contracting service companies and employment services.