What is an Area Developer in Franchising?

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FRANData, the company that operates the Franchise Registry for the U.S. Small Business Administration (SBA), announced last week that it adopted the standard franchise definitions used by the North American Securities Administrators Association (NASAA) in the Multi-Unit Commentary that was issued in Fall 2014.

This is important because it recognizes and implements some standardization in the franchise industry, which has historically been inconsistent when referring to certain types of franchise relationships.

Specifically, the NASAA Multi-Unit Commentary uses the following definitions, which will now be recognized by FRANData:

  • Unit Franchisee: An owner of a single franchise unit.
  • Area Developer: A person that is granted, for consideration paid to the franchisor, the right to open and operate multiple unit franchises, generally within a delineated geographic area. The area developer generally is a party to an "area development agreement" with the franchisor specifying the number of units to be developed and a development schedule, and the area developer or its affiliates generally are parties to separate unit franchise agreements with the franchisor. The area developer does not have the right to grant or sell unit franchises to third parties. This relationship is sometimes also referred to as a "multi-unit" or "area franchisee" relationship.
  • Subfranchisor: A person with rights related to granting unit franchises to third parties, generally within a delineated geographic area("subfranchise rights"). The subfranchisor generally is a party to a subfranchisor agreement, aka master franchise agreement, with the franchisor specifying the territory in which the subfranchisor may operate and a minimum opening schedule, and the subfranchisor is a party to unit franchise agreements, aka subfranchisee agreements, with third parties for unit franchises. The subfranchisor is typically obligated to provide support services to those third parties.
  • Subfranchisee: A third party that signs a subfranchisor's unit franchise agreement. The franchisor and the subfranchisor usually each receive a portion of the initial franchise fee and the continuing fees paid by each subfranchisee.
  • Area Representative: A person that is granted, for consideration paid to the franchisor, the right to solicit or recruit third parties to enter into unit franchise agreements with the franchisor, and/or to provide support services to third parties entering into unit franchise agreements with the franchisor. The person granted these rights is a party to an "area representative agreement" but is not a party to the unit franchise agreements signed by the third parties. The area representative, like a subfranchisor, usually receives portions of the initial franchise fees and the continuing fees paid by unit franchisees, depending on the services the area representative provides. The area representative's payment of consideration to the franchisor for the right to recruit and/or provide support to unit franchisees is the element that makes the area representative different from a franchise broker or selling agent.

FRANData's adopting these standard definitions will help the company work with franchisors, state administrators, and the SBA in benchmarking performance across brands and industries. "When franchisors ask us to benchmark their performance against their peers, it's important that we all agree on the types of franchising programs being used and their relative historical results," said Edith Wiseman, President of FRANdata.

"Franchisors use single-unit franchising, multi-unit franchising, area representatives, sub-franchising, master franchisees, licensing and other growth channels. It is crucial that we are able to do apples-to-apples comparisons when gauging the relative success of their efforts."

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This page contains a single entry by Matthew Kreutzer published on May 13, 2015 7:39 AM.

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