A franchise area developer enters a contractual agreement with a franchisor to develop multiple locations in a specific region or market area. This gives the developer exclusive rights to the franchise in that market throughout the length of the contract.
This arrangement offers numerous advantages to the franchisor and the area developer, but there are reasons for franchisors to be cautious. Learn more about what these arrangements look like and when they make sense for both parties.
What Is a Franchise Area Developer?
While any 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.
A multi-unit development agreement with the franchisor gives the area developer the right and the obligation to develop a set number of franchises during a set period of time in a defined market area.
- Alternate name: Multi-unit developer
How a Franchise Area Developer Agreement Works
For example, a multi-unit developer 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 non-refundable development fee, which is frequently applied on a pro-rata (or proportional) basis as each location’s franchise agreement is signed.
Assume a franchisor’s initial franchise fee is $30,000 and it requires 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
Franchise area developers exist in everything from popular fast-food restaurants, such as Subway and Sonic, to beauty spas, retail stores, accounting and tax services, fitness centers, contracting service companies, and employment services.
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 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 beyond the first five might be reduced further, 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, and supply chain logistics. 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 54% of franchised locations across the U.S. 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. The franchisor must risk taking a market off the table for a period for other development, and it's possible that the area developer may not meet their development timeline. These problems could be compounded if the developer does not operate their multiple locations to brand standards.
With today’s vetting protocols, this risk for franchisors 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 understands that strategic franchisees, private-equity franchisees, and franchisees that are simply looking to operate all have different needs and reasons for considering a franchise relationship.
The muti-unit offering and its marketing should therefore be intelligently developed to maximize the opportunity to be attractive to each class of multi-unit developers.
- A franchise area developer enters into an agreement with a franchisor to develop multiple franchise locations in a specific market over a set period of time.
- The area developer gets exclusive rights to the franchise in this market throughout the contract, along with possible financial incentives.
- A franchisor lightens some of the workload and cost of franchising in a new market, but should be careful to find the right developer for an agreement.