Franchise Area Development - Are Your Eyes Bigger Than Your Appetite?

Franchise Area Development – Don’t Bite Off More Than You Can Chew

Copyright, Nicholas A. Bibby. All rights reserved.

The term franchise area development means one specific type of business relationship in franchising, but the general principles can be used to understand other relationships like master franchise, 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, and hopefully able, business entity for quicker expansion of the franchise network. In the world of franchise area development, that’s where the simplicity ends and the nuances begin.

There are a number of hurdles to deal with in forming the franchise area development strategy and the relationship between franchisor and area developer. The major issue that must be resolved is the nature of the agreement. In other words, how is the area to be developed and under what conditions of ownership?

Franchise Area Development – Developer is Owner of All Units

In the first scenario, the developer is responsible for opening a specified number of units based on a pre-determined schedule, and in each case the developer is also the franchisee or 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 lose development rights to the territory, along with the cash paid at signing that secured the rights to the project. Of course, franchise area development is usually to the franchisor’s advantage because the franchisor is gaining the potential for many units on the basis of one franchise sale. There is little downside for the franchisor in this scenario. If the developer does not produce, the territory can be taken back and re-marketed, if the concept and territory has continued value. For the owner of franchise area development rights, who in this scenario is a franchisee with a big production monkey on his back, the main advantage is the right to the brand within a specific geography. However, there is not only the possibility of losing the down payment made on each unit to be developed, there is a real potential disadvantage if the concept is unproven. If the first unit built in the territory is a bust one can cut their losses by not opening more units, but there will be a large cost lost in the initial franchise area development rights and the cost of opening the first unit. 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.

Franchise Area Development – Developer is Franchise Owner and Franchise Seller

A variation of the first scenario involves franchise area development where the developer grows a territory through a combination of  units that the developer owns and others that the developer sells. 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 could throw the franchise area development 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 Franchise Area Development

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

The Art of Franchise Area Development

Art is measured by the quality and creativity of the strategic plan. That makes the difference between success and merely formalizing an agreement. Quality franchise 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 partnered with promises kept, but often promises of staying united through thick and thin are forgotten when the results of poor planning surface. With good strategic planning, area development can be successful. 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.

In addition to this article, you can hear about franchise area development via franchise streaming audio.