There are a number of different ways to invest in a franchise. Whether you simply want to focus on a single unit, or perhaps develop multiple territories, there are a number of options available. If you’ve been researching the industry, some times the different types of ownership options can be very confusing as sometimes people use different definitions for different types of ownership types.
In this article I would like to discuss the concept of Area Development.
Area development is where a franchisee agrees to own and operate multiple units in the same geographic location. In this type of agreement, the franchisor sells a defined region where the franchisee agrees to open a pre-determined number of locations over a defined time period. This is where Area Development is different than Regional Development or Master Franchising.
A defined territory and set number of units to be developed…
When you’re an Area Developer (AD) for a franchise, you are required to develop a set number of units over a certain time period. The size of the territory and the number of units will vary depending on the market. You will typically start by opening one location, with additional units opening every twelve to eighteen months. In a Regional Development arrangement, owner of the territory can determine the number of units to open within the market. They have a lot more control in the process versus an AD.
Experience is required…
Area Development requires a bit more experience and investment capital versus operating a single unit franchise location. In this arrangement, you’re typically looking at opening a minimum of five plus locations. Area developers can be the sole operators of their locations, or, if they choose, can actually be responsible for selling additional territories if that’s how they prefer to grow their business. This is all a function of your business goals, as well as the agreement with the franchise.
The Advantages of Area Development
Area development can be a very lucrative opportunity for all parties. The franchise will engage in this type of arrangement because it can help them expand their brand faster. Essentially they are outsourcing, or sub-franchising the opportunity and partnering up with an experienced business owner. The AD will be responsible for opening new locations and assisting and supporting the new franchises in their territory. In exchange for this support, the AD will receive a split of both the franchisees and royalties within their territory. This provides the AD with the opportunity to build residual income for their locations. As the royalties are typically based on a percentage of gross sales, there is a strong incentive to help franchisees in their location with their business.
Requirements to be an AD
The costs to purchase the rights of a particular territory will vary depending on the size and number of units to be developed. Since you’re typically looking at a minimum of 5 units, the initial fee can range from $100,000 and up. In terms of the total capital needed, that will depend specifically on the type of business. A successful AD will have good business skills including, sales, marketing and management. Since you’re overseeing and supporting multiple business owners, you need to have the necessary skills to oversee multiple business operations and be comfortable in managing people.