What Is Area Development And Could It Be For Me?

06/02/2018 08:00 | Start a business

Area development - could it be for you?

For some entrepreneurs, only the biggest franchises will do. Not content with a single unit franchise, these ambitious and driven franchisees want more right from the start. Welcome to the world of an area developer.

These are franchisees that choose to sign up to opening an agreed number of units, over a certain period, within a given geographical area. To secure exclusive rights, an area developer pays an up-front development fee, and a franchise fee every time they open a new unit. This requires a significant franchise investment, but financial incentives tend to be available as additional units are opened. In basic terms, franchisors reward area developers for buying in bulk and building the brand successfully in their territory.

How is an area developer different to a multi-unit franchisee?

Although the aim of both an area developer and a multi-unit franchisee is to build the biggest franchises over time; the way they achieve this goal is slightly different.

A franchisee may acquire multiple units, or even several franchise brands, over a period of time, and they do this at their own pace. As the confidence of the franchisee grows along with the business, they may decide that the time is right for expansion and purchase another franchise.

In contrast, an area developer enters the franchise relationship with a plan to develop multiple locations. If they fail to do so, they may be reprimanded financially, lose their exclusivity, or even have the agreement invalidated. Though, in reality, as the area developer and the franchisor have a common interest in growing the brand, there's usually room for negotiation.

What has led to the increase in area development?

Franchising has changed over the last couple of decades. There is a noticeable shift from smaller, single-unit franchisees, to a new breed of entrepreneur who has more money to spend and dreams of becoming amongst the biggest franchises.

Multi-unit franchises were once the exception rather than the rule, but according to the British Franchise Association (bfa), there was a 14% rise between 2013 and 2015, and this growth is expected to continue. With approximately a third of franchisees in the UK now running more than one franchise unit, and 20% of single-unit franchisees making plans to buy another, the landscape of franchising is continuously evolving.

But, what motivates an area developer to take on the challenges and complexity that goes hand in hand with multi-unit franchising? Diversification is one driving force. Just as an investor would balance the risks in their portfolio by purchasing different types of stocks and shares, a similar approach is being adopted by area developers. By choosing franchise brands in different sectors and in different markets, the ups and downs of an uncertain economy are smoothed out, and the franchise investment protected.

Advantages of being an area developer

As well as being able to diversify a franchise portfolio, there are also other benefits to taking on the challenge of area development:

  • Area developers with multiple units get to take advantage of being the only franchisee in that geographical area for the term of the franchise agreement. The exclusivity will then return to the terms of each individual franchise contract once the area developer has opened all the units they signed up to, or when the agreement expires.
  • Discounts are also available on the franchise fee for area developers. The initial franchise fee may be the same as a single-unit franchisee would pay for the first location, but then subsequent franchise fees would be reduced.
  • As well as paying less for the initial franchise fee, area developers may also benefit from lower royalty fees once a certain number of locations have been established. This reduction is reflected in the fact that the costs of supporting multi-unit franchisees are less for the franchisor, and this saving is passed on to the area developer.

Advantages of area development for franchisors

There are also many benefits of the area development model for franchisors too, which has had an impact on the increased numbers:

  • Area developer franchisees tend to be experienced, skilled and knowledgeable business owners with a proven track record of success. Dealing with franchisees of this calibre and professionalism makes the franchisors job much easier; and less stressful.
  • Another advantage for the franchisor is the fact that area development agreements allow the franchisor to have fewer franchisees within their business. Having one area developer owning multiple units takes far less training and relationship building than if a different franchisee owned each individual franchise location.
  • Franchisors are also able to expand at a much quicker pace with area developers than they could with single-unit franchisees. This is because as well as area developers being more experienced, they also have access to better finances than a novice franchisee.

Franchisors should enter area development with caution

By far the biggest risk to a franchisor entering into an area development agreement is choosing an unsuitable franchisee. The franchisor is entrusting the area developer to manage all the units in an exclusive territory effectively and profitably.

If the developer does not open the agreed number of units within the specified timescale, or they dont operate their franchises to the expected brand standards, then a franchisors whole business is jeopardised.

These risks can be mitigated with robust recruitment processes. But, while its important that that franchisor makes the right choice, a prospective area developer must also ensure that they partner with one of the most suitable franchise brands to align with their ambition and passion.

Obviously, becoming an area developer is not a job for the faint hearted. But if youve got the drive and determination to make a substantial franchise investment, then joining forces with the right franchisor in the right market; area development could be for you.

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