This is the center of every franchise arrangement. A franchise agreements
grants franchisees the right, for a fee, to operate a single franchised
business, in accordance to the terms as set forth in the agreement. Every
franchised business needs a separate franchise agreement.
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 will provide services to the franchisees in the
territory. The master franchisee will oversee the development of the territory
according to an agreed upon development schedule. The master franchisee
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 franchisees.
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 territory.
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 and pay fees for development 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.