Area Development: Both an Art and a Science

Although referred to by a variety of terms such as "master franchise," "master license," "regional development," or "area development," the concept is quite simple: the rights to develop a specific geographic territory are granted by a franchisor to a willing (hopefully able) business entity for quicker expansion of the franchise network. That's where the simplicity ends, and the nuances begin.

There are a number of hurdles to deal with in forming the development strategy and the relationship. Here is just one major issue that must be resolved in order to realize a successful development project. It is the nature of the agreement.

In one scenario, the developer is responsible for opening a specified number of units based on a pre-determined schedule, and in each case the developer as well as the franchisee/owner of the units. The key benefit to developers is that they are granted a block of time to build the franchisor's network within a specified territory. The pressure sits squarely on the developer's shoulders to meet deadlines or loose the right to the territory, along with the cash paid at signing that secured the rights to the project. The advantage to the franchisor is a "built-in" multiplier in the form of an investor who agrees to buy and install a certain number of units. There is little downside for the franchisor in this scenario. If the developer does not produce, the territory is taken back and probably re-marketed. For the developer, a franchisee with a big production monkey on his back, the main advantage is the "right" to the "brand" in a desired part of the world. Besides the possibility of loosing the down payment made on each unit to be developed, the other disadvantage involves unproved concepts. If the first unit built in the territory is a bust (for any number of reasons), you can cut your development losses by not opening more units, but you lost by opening and failing with unit number one. Of course the strongest argument in favor of this arrangement is the success of many super food concepts where many investors realized true wealth. It takes deep pockets (or borrowing power), a great, proven concept that works across geographic boundaries, good organizational skills, good franchise relationships, focus, and a strong constitution. The main caveat? Buy a concept that has proved successful in a variety of markets.

A strong variation of the first scenario involves developing the territory through a combination of developer owned and developer assisted units. The developer seeds the area with self-owned units and then works with the franchisor in securing and supporting other franchisees in the territory. If handled correctly, there are several advantages to this arrangement. The developer acts like a franchisor by using other people's money and management to grow the area in the form of franchisees. The developer can also share in the royalty stream generated by franchisees for work normally provided by the franchisor. The franchisor benefits from the close proximity of supervision and support provided by the developer. The franchisee also benefits from that proximity. The downside of course, is that if either franchisor or developer do not provide the support services required, the trickle down effect on franchisees would throw the area development, and perhaps even the network, into turmoil. The main caveat here? Above all, both the developer and the franchisor must have the skills to perform their part of the agreement.

The "science" of the concept involves proper test marketing, contracts, pricing, support splits, training assignments, organizational/operational guidelines, territory and demographic analysis, and concentric sales to build a sound foundation. All of this is basic franchising 101. BUT, the "art" of the concept is something entirely different.

"Art" is measured by the quality and creativity of the strategic plan; that will make the difference between success and merely formalizing an agreement. Quality area development must be rooted in "intelligent partnering." Area development dictates dynamic team building. Unless personalities mesh, goals and visions are shared, and handshakes are heartfelt, trouble and disappointment are on the horizon. Franchising should be maturing, but often promises of staying united through thick and thin are forgotten when the results of poor planning surface. With meticulous strategic planning, area development can be a joy rather than a joust. Beyond the obvious need to begin with a quality franchise offering, it is again the concept of "fit" that will spell the difference between success and failure.

Copyright Nicholas A. Bibby and Matthew T. Bibby, all rights reserved.