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Development Agents: A Blessing or a Curse?

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A number of franchisors look to development agents for increased system growth. Despite the benefits this approach can provide, there are also a number of drawbacks.

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 operator.

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 agent program.
  • 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 franchiseknowhow@gmail.com 

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