FRANCHISOR 101: AREA DEVELOPER OR MASTER DEVELOPER?
Regardless of the exact nature of a development agreement between a franchisor and a franchisee-developer, the purpose of this relationship is the same: to speed up the development of the franchise system in a particular geographic area.
Under an area development program, the franchisor will grant the franchisee-developer the exclusive right to develop and operate a minimum number of franchised units in a defined territory within a specified period of time according to a development schedule agreed upon by the parties. Each franchised unit operates under its own franchise agreement between the franchisor and franchisee.
Under a master developer program, the franchisor will grant the franchisee-developer the exclusive or non-exclusive right to solicit and sell a minimum number of franchises for the franchisor in a territory under a development schedule. The franchisee-developer must then assist these franchisees in site selection and provide them with training and operations support in exchange for a portion of the initial franchise fees and royalties that would otherwise be paid to the franchisor. Each franchised unit operates under a franchise agreement between the franchisor and franchisee.
Each program has benefits for both the franchisor and franchisee-developer:
Under the area developer program, the franchisor will receive development fees for the opportunity granted, initial franchise fees for each unit and royalty income from franchise operations. The franchisee-developer gains exclusive rights in its territory and, in some cases, may pay less per unit as the number of purchased units increases. If the franchisee-developer does not stick to the development schedule, the franchisor generally will have the right to open up the exclusive territory to other area developers, reduce the number of franchised units that the franchisee-developer can open or terminate the development agreement and take the territory back. However, the franchisee-developer will generally continue to own and operate the units that were opened before termination.
Under the master development program, the franchisor shares its revenue streams with the franchisee-developer, but is relieved of the responsibility to recruit, train and support the franchisees in the territory.
Again, if the franchisee-developer does not perform, the franchisor has the right to terminate the future rights of the franchisee-developer, who may still earn certain fees from the franchised units that were opened before termination.
As in most cases in franchising, the key ingredients for each program are the quality of the franchisee-developer and a realistic and achievable development schedule. Experienced franchise counsel can provide the structure for both programs.