Can You Build Wealth With an Area Developer Franchise Opportunity?

Posted by Tom Scarda, Certified Franchise Executive on Dec 14, 2018, 2:40:05 PM

In franchising, how to buy a franchise, franchise opportunities, Multi-unit franchise

Is your objective to build wealth? Do any of the following statements apply to you and your search for a franchised business?  

  • You have leadership experience, i.e., guiding others either in your job, business, school, church, civic groups, sports teams, volunteer groups, or other organized settings.
  • You have business and/or financial management experience
  • You are seeking a larger-than-normal business opportunity that will generate notable income and respectable equity over a 2-5 year period.
  • You can commit to an investment of at least $100,000 or more, that is obtained through either your existing resources, investment partners, or a lending institution.
  • You can envision yourself learning 1) franchise development skills business promotion, interviewing/qualifying potential franchise candidates) as well as 2) operational/management/training skills (helping unit franchisees build their businesses) You do not need a passion for the end product.
  • You have the vision and the willingness to build a business throughout a fairly substantial market, e.g., a metropolitan area, one or more counties, part of/whole state, multiple states, etc. (NOTE: Different businesses offer different sized territories.)

If you said yes to three or more of these times, you might want to consider building a multi-unit franchise operation. Typically these businesses enable an individual (or family/company/group of investors) to generate more income and build more equity.  They also require more work and larger investments than do unit franchises.  And, they are more difficult to obtain. The franchisor is very discerning when it comes to awarding these type of opportunities. When the match is right, however, the rewards are also notably larger. Family dynasties can be built with multi-unit franchise agreements.

NOTE:  My wife and I owned and built a multi-unit franchise operation for several years, and we loved it. It was a very rewarding experience to build it…as well as to sell it. If you decide to investigate this type of franchise opportunity in your area, I will be happy to relate our experiences to you.

TYPES OF MULTI-UNIT FRANCHISE OFFERINGS

Please allow me to briefly outline the different types of multi-unit franchise structures that many U.S.-based franchise companies use today.

Area Development Agreements  (ADA’s)

Typically this type of franchise offering simply allows a person/company/group to build and own more than one unit franchise within a defined geographical area.

Most often, these agreements are “single tier” arrangements, meaning that the holder of the multi-unit agreement agrees to build all of the unit franchises in the designated territory themselves (no “sub franchising” to others) and the parent company agrees to provide all of the support to the franchisee (no middle entity between the parent company and the unit franchisee).

These agreements almost always contain a “developmental schedule,” in which the franchisee agrees to open “X” number of unit franchises over “Y” months or years. The number of units can vary according to the arrangement between the parent company and the franchisee.  Most companies have pre-determined criteria for determining how many unit operations can be built in a designated territory.  Often the initial franchise fees are discounted after the initial unit.

Restaurant franchise companies commonly use single-level area development agreements to build their brand throughout a McDonalds signdesignated area.  McDonalds used this mechanism in their “early days” to create those “McDonalds Millionaires” that you have heard about for years.

Regional Franchise Agreements

Regional franchise agreements are “two-tier” arrangements, in which the parent company authorizes the regional franchisee (often called a regional director) to do two things: 

1) recruit qualified individuals to own the unit franchise, and

2) provide local support to the unit franchisees. 

In exchange for these two business-building functions, the parent company financially rewards the regional franchisee using one or more of the following income sources:

  1. Paying the RD a portion (typically 50%) of the initial franchise fee (“the franchise fee”) for each unit franchise they award in their designated region.
  1. Paying the RD a portion (typically 50%) of the on-going royalties paid by the unit franchisees throughout the lifetime of their franchise agreement.
  1. Some companies who sell products to their franchisees also include some type of bonus commission to the regional director, based on wholesale purchases made by the unit franchisees in the regional territory.

In essence, a regional franchise owner (RD) is an independent contractor, not an employee, who is awarded the right to build the respective business over a defined geographical area.  They are compensated for doing so, AND the RD has the right to sell the business.  The relationship is defined by a 2-way agreement between the parent company and the RD.

Several franchise companies use this form of multi-unit franchising to create more rapid growth of their business throughout a large geographical area, such as a county, a state, or a section of a country.  For example, Century 21 used this mechanism to dominate the residential real estate market in the 1970s and 1980s. Most recently, Orange Theory Fitness and Massage Envy have used this approach. These companies success in doing so is legendary.

Master Franchise Agreements

Master franchise agreements are USUALLY the same—or quite similar to—as  regional franchise agreements. This term is often used to refer to countrywide agreements for a country (or part of a country) outside the US, e.g., Mexico, England, Spain, etc.  Some companies use this designation inside the U.S. also.

Clarifying Notes

Different companies can use these terms in different ways, so you ALWAYS need to be sure exactly what a specific company means when they use one of these three terms. Two companies can use the same term to refer to two different multi-unit business formats. 

For example, the term area development agreement can be used as a generic term to apply to any or all of the arrangements outlined above.  The terms “master franchise” and “regional franchise” can be used interchangeably to refer to the same business arrangement.

My Thoughts on Multi-unit Franchise Agreements

I am reasonably well versed in multi-unit franchise arrangements. As noted above, my wife and I built a regional franchise.  In addition, I have placed candidates in regional franchises throughout the U.S.  I also helped develop and administer training programs for this type of franchised business. 

Not all companies issue multi-unit franchise agreements, while others prefer to do so over issuing single-unit agreements. Some companies will do single-tier area development agreements, but will not do two-tier regional franchise agreements. Other companies will do all three types of arrangements, e.g., single-unit agreements, area development agreements (single-tier), and regional franchise agreements (two-tier).

To take their business to an overseas country, the vast majority of U.S. franchise companies prefer the master franchise agreement, so the parent company has only one entity to work within each country.  Otherwise, international expansion can get a bit cumbersome. 

CONCLUSION

All companies are reasonably “picky” when evaluating a potential candidate for a multi-unit franchise agreement.  They want to make sure the person/company/group/family they select has the financial resources, business experience, and personal characteristics necessary to build their larger businesses. They represent the franchise company as a micro-franchisor in their area.

Sometimes it makes sense to consider this form of franchising and other times it does not. When it does make sense, and a person’s qualifications are in order, and the opportunity fits all the parameters, we can discuss the possibilities.

REMEMBER:  For multi-unit franchise offerings, companies are NOT seeking experts in the “end-use” of their products and/or services. Instead, they are looking for individuals who have the desire, skills, resources, and support to build LARGER multiple-area businesses. Typically they are looking for individuals who can lead people and manage money and time.  These are “executive-style” business opportunities.

If you have big goals and objectives for the business that you build, being and Area Developer or Master Franchise owner may be the route for you.