In the last several weeks, I have had several questions from clients regarding methods of franchise expansion. There are several tiers of franchise licensure that are used to accelerate franchise expansion including multi-unit franchising, area development, and master franchising.

The most basic and simplistic method used for rapid franchise system expansion is multi-unit franchises. In a multi-unit franchise schema, existing and prospective franchisees are offered the opportunity to own multiple or several franchise locations. To optimize a multi-unit franchising model, a discount for multi-unit owners may be offered via the disclosure document in Item 5.

The next tier for franchise expansion is an Area Developer offering. In this model, an area developer is licensed to recruit prospective franchisees and support existing franchisee training and development in exchange for a share of the initial and on-going royalty fees.

The last tier is master franchising. Under a master franchise arrangement, the master franchise, in specified areas, is given the right to sell and manage unit franchises. In the model, the master franchise, in essence, steps in the shoes of the franchisor for an established area. The master franchise pays to the franchisor a portion of the collected initial and on-going royalty fees.

The lines between tiers can get blurred. Not all terms are used by everyone the same way. For example, an area development agreement may simply be an embellished multi-unit agreement whereby the area developer is charged with opening numerous unit locations on an established time table. In this mode the area developer payment a developer agreement and the franchisor commits not offer or sell franchises with the development area. (note: I don’t understand this last sentence but I think it needs something.)

An Area Developer and Master Franchise model requires a separate and distinct set of disclosures in the FDD and state registrations. The disclosures, in some case, may be incorporated into the existing FDD. Integration of the area developer or master franchise agreement can create confusion, and a separate disclosure document may be required.


A Post from the Field: Master and Area Development Agreements: Vehicles for Franchise Expansion

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