The Area Development Franchise Has Its Drawbacks
by Ed Teixeira
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
- 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
- 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
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 firstname.lastname@example.org