What is a Franchise Agreement?
This is the center of every
franchise arrangement. A franchise agreement grants franchisees the right, for a
fee, to operate a single franchised business, per the terms as outlined
in the agreement. Every franchised business needs a separate franchise
Master Franchise Agreement
A master franchise agreement grants a master franchisee (or subfranchisor)
the ability to approve franchises to others in specific geographical locations.
The master franchisee:
- Provides services to the franchisees in the territory
- Oversees the development of the territory according to an agreed-upon development schedule.
- May satisfy some of the development by operating franchised businesses
in its territory
Fees are typically split with the franchisor, based on the proportionate
share of responsibility. In some registration States, including California,
master franchisees must register and provide disclosures (FDD) to prospective
This is also known as an "area director agreement" or "area
franchise agreement,” an area representative agreement grants the
contracting party similar rights and abilities, but with less responsibility
and rewards than that of a master franchisee.
The area representative, normally cannot grant or sign franchise agreements,
but only the right to help with the franchise marketing process and provide
assistance to franchisees on the franchisor's behalf, within a specific
The franchisor will collect the fees from franchisees and then pays the
area representative a percentage. The area representative in many cases
does not own a franchised business.
Area Development Agreement
An area development agreement is, in essence, an option agreement wherein
an area developer agrees to open and operate a specified number of franchised
businesses in a specific location. They also pay fees for developers to
obtain exclusive rights to create more units in the area, conditioned
upon a development schedule. Normally each franchised business opened
is memorialized with a separate franchise agreement.
Development fees paid upfront are typically applied against the initial
franchise fee for each franchised business opened. We see a large portion
of area developers fail to meet their development schedule, which may
cause a termination of the development agreement and forfeiture of the
remaining upfront fee paid, or a revision of the development agreement.
In some registration States, such as California, the franchisor must file
and provide an FDD specific to this type of Agreement.
Click here to learn more about franchise agreements.