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The Area Development Franchise Has Its Drawbacks

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The area development franchising model has a number of advantages not the least of which is the potential for faster system growth. However, there are a number of disadvantages as well.

A fairly recent franchising strategy to evolve over the last few years is the area development franchise model. Although not a new concept, more and more franchisors embrace this approach as a way to achieve faster system growth and market penetration. If successfully executed by qualified, well capitalized and competent area developers there can be significant benefits however, if the wrong group or individual is the area developer, the loser is not only the area developer but the franchisees and the franchisor.

I happen to take the position that an area development program can be difficult to pull off and may present more problems than necessary. This is especially true for start-up franchisors that see the area developer as a pathway to faster system growth in multiple markets with franchise networks administered by area developers.

In most cases, the area developer has paid a significant fee to develop a territory, State or region. They open a unit franchise and then commence to sell franchises to candidates recruited by franchisor leads. There is a split of the initial franchise fee and a portion of on-going royalties for training, grand opening assistance and support provided by the area developer.

On the surface this model seems to have valid benefits but I see a number of disadvantages especially for new franchisors.

  • The franchisor has added a layer between themselves and the franchisee. This might work in a corporate structure but franchising is a different matter.
  • Certain franchise concepts, especially more complex models, donít lend themselves to an area development program.
  • A new franchisor that launches a new franchise program has yet to fully refine their franchise program.
  • Franchisor quality control and auditing activities may be diminished.
  • If the area developer fails to meet their development schedule they may forfeit fees or deposits. In some cases the developer may push for weak franchise candidates in order to meet their development quota. This could result in litigation between the parties.
  • The franchisor by delegating a significant amount of responsibility to the developer can lose touch with certain franchisees.
  • Since the franchisees operating in an area developer territory have a franchise contract directly with the franchisor, disputes and problems can pull the franchisor into litigation.

Although an area development program can provide a number of advantages for franchisors the disadvantages and risks can outweigh the benefits.

© 2011 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com

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