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New Franchisors Should be Cautious Introducing Area Representative Programs

by Ed Teixeira

Learn why new franchisors should be cautious when offering an Area Representative opportunity.

A number of franchisors offer an Area Representative program, in addition to the traditional unit franchise opportunity.  Occasionally, confused with an Area Developer or multi-unit franchise development program (common in the QSR sector a franchisee entity contracts to open multiple locations) an Area Representative is responsible for executing a franchisor’s plan in an assigned territory. An initial franchise fee is paid for a territory or region, capable of accommodating multiple franchisee locations. The AR is typically responsible for recruiting franchisees, site-location, in some cases responsible for training, on-going support and administering franchisee compliance with system standards. An AR can receive a portion of the franchise fee and a percentage of the royalty. Under an AR program a franchise agreement is executed between the franchisor and the franchisee in the AR territory. A recent change in franchise disclosure requires that the offering of Area Representative Franchises by a franchisor must be in a separate FDD from the offering of the unit franchise.

The most successful AR program was implemented and executed by Subway, which has added thousands of franchisees under its Area Representatives. In the recent past the AR program has become popular among a number of start-up franchisors, with the allure of providing fast system growth. Over the course of this year, statistics will be available via FranchiseGrade.com as FDD’s are updated including the separate AR FDD’s.  Although there can be substantial benefits from an AR program, its implementation by new franchisors should be carefully considered.  In fact, I would recommend that new franchisors forego introducing an AR program until their franchise system is settled and has undergone a degree of maturity.

The reasons are:

1. Regardless of how prepared a company is when introducing a new franchise program, there will always be some adjustments that will need to be made. By entering an AR program before a “shakedown” period for the new program has passed, could result in lots of problems.

2. An AR relies upon new franchise sales in order to earn an ROI on their investment. An aggressive AR may attempt to bring on unqualified candidates, in order to populate their territory or meet their performance goals.

3. Although an AR has responsibilities to support new franchisees in their territory, the AR is a quasi-broker in terms of franchise sales.

4. A complex franchise program that requires substantial oversight and support may not lend itself to an AR program.

5. An AR can be a buffer between the franchisor and franchisee, which can be a benefit but also problematic. The franchisor which is on the franchise agreement with its franchisees could be in the dark regarding franchisee problems, since the AR is the initial contact. Moreover, in certain cases a disgruntled franchisee may be reluctant to bypass their AR and contact the franchisor directly.

6. Under an AR program there is the potential for vicarious liability due to the AR servicing the franchisees. This means that the franchisor must diligently oversee and monitor the performance of its AR’s. This begs the question; why a franchisor should have an AR program when it can retain all fees and royalties and utilize its own employees?

An Area Representative program is a tempting concept for franchisors offering a pathway for faster growth. However, before introducing an AR program the implications should be carefully considered. This is especially true of new franchise systems, which have yet to establish the foundation of a solid franchise network. 

© 2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

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