Multi-Unit Development Arrangements

There are three types of agreements used when a franchisor desires to expand through multi-unit as opposed to single unit development: Master Franchise Agreement, Area Representative Agreement and Area Developer Agreement. Before exploring some of the basic elements of each arrangement, it is important to note that there may be franchise registration requirements associated with entering into any of these agreements and it is important to speak with a qualified attorney who can help you understand the impact of each type of arrangement.

Master Franchise

This type of multi-unit development is most often seen with international expansion. In this type of arrangement, the franchisor will delegate nearly all pre-sale and post-sale obligations to the master franchisee who essentially acts as a sub-franchisor. However, while most of the franchisor’s obligations are delegated, most franchisors will retain the right to ultimately approve or reject sub-franchisee candidates and specify the format for the FDD and the Franchise Agreement. The reason for this is that in the event the Master Franchise Agreement is terminated, a franchisor needs to agree with the obligations and requirements imposed on both the sub-franchisee and the franchisor.

If you are a franchisor seeking to expand through a Master Franchise Agreement, or a franchisee looking to purchase a Master Franchise Agreement, there are some key provisions that need to be addressed in the agreement. Among the provisions to be aware of:

·         Is the master franchisee required to sign the sub-franchise agreements;

·         Is there a strict development schedule;

·         Is the master franchisee allowed to develop his/her own franchise units;

·         How are the currency issues handled;

·         How are taxation matters handled;

·         Is there a translation requirement;

·         What is the term;

·         Are there country-specific franchise laws that must be followed;

·         At the expiration of the term of the Master Franchise Agreement, what happens to the then-current sub-franchisees, their territories and their agreements;

·         What is the royalty and other fee splitting arrangement (if any); and

·         What is the territory and is it exclusive.

Area Representative

In this type of arrangement, the franchisor typically delegates only certain pre-sale and post-sale obligations. The typical area representative relationship is one where the area rep helps to advertise and promote the franchise opportunity in a specific market, engages potential franchise candidates and helps provide operational support and guidance to the any franchisee resulting from the area rep’s efforts.

Key provisions to be aware of in this type of arrangement include:

·         What is the territory and is it exclusive;

·         What specific post-sale obligations and services are to be performed by the area rep on the franchisor’s behalf;

·         If there are current franchisees in the territory, will the area rep perform the services and obligations to them or only to new franchisees;

·         What is the term;

·         What is the compensation/fee arrangement; and

·         Does the franchisor have the right to open and operate company-owned units in the territory without compensation to the area rep.

Area Developer 

This type of multi unit development arrangement is most closely aligned with single unit franchising and is a common form of development. Here, the third-party developer agrees and commits to develop and operate a specified number of units in a designated territory. This arrangement is most commonly used in a domestic market where there is a low or non-existent franchisor presence.

Key provisions to be aware of in this type of arrangement include:

·         What is the term and time frame for developing the units;

·         What is the territory and is it exclusive;

·         Are additional franchise units outside the development schedule allowed;

·         What is the price per franchise unit developed; and

·         What happens to existing franchise units of the area developer if the Area Development Agreement is terminated.

With each type of multi-unit arrangement there are several additional factors to consider. It is important to have a clear idea of why you are seeking either to expand through multi-unit development or to purchase a multi-unit development agreement, and to discuss these ideas and plans with qualified professionals.