Development Agents: A Blessing or a Curse?
by Ed Teixeira
A number of franchisors look to development agents for increased system
growth. Despite the benefits this approach can provide, there are also a number
The sale of new franchises continues to be primarily via the sale of unit
franchises, whereby the franchisee acquires the right to operate a single
franchise in a specific geographic territory. A unit franchise strategy provides
the franchisor more control over the selection and operation of the franchise
and only one territory is at risk versus a large geographic area. The franchisor
can more readily control the expansion of the franchise network and dealing with
a smaller unit franchisee may be easier compared to a large well capitalized
For a number of years, franchisors, especially in the food segment, have
encouraged and some even required a multi-unit franchisee, where the franchise
entity agrees to develop a minimum number of locations in a market. This
approach allows for well capitalized franchisee entities to build brand
awareness in a market and obtain favorable purchasing arrangements from vendors.
A franchising model that has gained popularity is the development agent
program. Under this arrangement the development agent is an individual or
franchisee having the rights to develop a particular region or territory. The
developer is usually responsible for marketing and selling new franchises,
providing training and on-going support. For these services they receive a
portion of the initial franchise fee (50%) and the on-going royalty (40-50%).
The individual franchise agreement is between the franchisor and each individual
franchisee. The developer pays an initial fee for the territory or region which
could range from approximately $100,000 to $250,000 or more. The developer then
has an investment in their initial franchise and the development rights to a
territory. The dramatic growth of the Subway franchise network has been
attributed to its Development Agent program, which is similar in concept.
Benefits of the Development Agent Strategy:
- The ability to achieve
faster growth using well funded developers
- Outsourcing franchisee
services to the development agent allows a franchisor to digest a faster rate of
growth without a diminution of services
- Maximize advertising budget
and franchise leads by having a larger geographic area to franchise
- Share the franchise
development costs with the development agents
- Maintain the contractual
relationship with the franchisee. If the development agent is terminated the
franchise contracts remain in force between the franchisor and franchisee
- Introduce and promote the
franchise brand into more markets
Disadvantages of using Development agents:
- If the development agent
fails or creates problems, the franchise brand and image can negatively impact a
large region or territory
- Particular franchise
concepts work better than others under a Developer program. A good rule of thumb
to follow: the more complex the franchise operation the riskier a Development
- A start-up or newly
emerging franchisor may use development agents before the franchisor has gained
adequate experience regarding their franchise operation.
- By virtue of the financial
arrangement between the franchisor and development agent some developers may not
retain enough of the franchise fees to fund on- going growth. Hence the need for
well capitalized developers
- The franchisor is
delegating significant responsibility and control to the developer. If the
developer fails the franchisor will bear a certain amount of responsibility in
the eyes of the local franchisees.
- Since the developer shares
a portion of the initial and on-going franchise fees, this arrangement could
lead to conflicts between the franchisor and developer.
- Developers may be
undercapitalized which prevents them from meeting their performance goals. It
can cause them to recruit marginal franchise prospects.
- Franchisors rely upon
developers for training and support. A weakness in these areas can adversely
affect both franchisee and franchisor.
A development agent program can be an effective way to grow a franchise
network provided that the franchise concept is properly designed and
implemented. It can provide an opportunity for a franchisor to build a franchise
network over a larger geographic area in less time. Conversely, there can be
drawbacks to this strategy depending upon the franchise program and its
operational requirements. A number of franchisors have introduced a development
agent program only to abandon it in favor of the more traditional unit and
multi-unit concepts after experiencing problems.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC.
He can be reached at