Continuing with our series of franchising terms and definitions, today we’re talking about the Area Development Agreement.
In an area development agreement, the franchisor grants exclusive development rights for a particular geographic area to an area development investment group or an area developer. In return for the rights to an exclusive territory, the area developer pays the franchisor a front-end development fee and commits to develop a certain number of units within a specified period of time.
An area developer, which is often an investment group but can also be an individual person or franchisee, puts down a substantial upfront payment in order to secure the exclusive rights to develop franchise locations for the franchise in a specified territory. When they sign the area development agreement, the area developer, or area franchise, essentially purchases the rights to a territory where they can then turn around and sell sub regions to new franchisees within their territory.
An area developer, sometimes also referred to as a master franchise, can purchase a large area and then develop that area themselves by selling individual locations to new franchisees. Essentially, they can help grow the franchise more rapidly by acting as an extension of the sales force.
An area development agreement is almost always centered around a very large market with a high population density, or a large geographical region with a lower population density, with the idea that both can create similar opportunities to sell locations to many new franchisees, with each franchisee having enough business in their area to sustain growth.
NOTE: A multi-unit developer can be confused with an area developer and the Area Development Agreement. Click here for more about the Multi Unit Development Agreement.
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