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Area Development Agreements in the Florida Climate
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When thinking about buying a franchise, one option to always keep in mind is becoming an Area Developer. Most Franchisors choose to sell multi-unit franchises (Area Developers), as well as the standard single-unit franchise, to enable a broader reach for their franchise system. This marketing strategy gives Area Developers the chance to bring the franchise into their territory while keeping that territory protected from others.
Before getting into what an Area Developer is, let's discuss what a franchise is and who polices it. A franchise is a legal agreement between a business (aka Franchisor) and a person, or group of people (aka Franchisee) to operate a business under the same logo, name, and look of the franchisor. The franchisor is expected to train the franchisee and give ongoing support while in return the franchisee is expected to pay regular fees for sales, advertising, ongoing support etc.
When it comes to policing franchises in Florida there are two entities, the Federal Trade Commission and Florida law. The Federal Trade Commission ("FTC") is the federal governing entity over franchises which set forth the overall format and requirements for creation of the franchise and operation of the franchise. Through their Franchise and Business Opportunities Rule, the FTC has put together a set of rules which tells the franchisor what must be included in the Franchise Disclosure Document Items 1-23. The FTC is always a good place to find information and do research on buying a franchise and making sure the franchise you are looking at is complying with the rule, because if the franchisor is not complying with the Franchise and Business Opportunity Rule, you could find yourself in a franchise that gets shut down leaving you on your own without a support or distribution system. On the state side, Florida follows the format of the FTC regarding creation of the FDD, however, Florida allows for a franchisor to sell in the state after filing a Franchise Exemption Application. Florida's Franchise Exemption Application is a requirement to sell franchises in Florida. One note for franchisors, even if you are federally compliant with your FDD, always make sure that you have filed the Florida exemption notice with the appropriate Florida state agency. The relatively low fee it takes to file the Exemption application is a lot less than the fine that you may be charged if you are caught selling without it.
At its most basic, an Area Development Agreement, ("ADA"), is an agreement between the Franchisor and a franchisee wherein the franchisee is awarded the right to take a larger than normal territory and cultivate it through multiple locations on behalf of the Franchisor. The Area Developer is required to open and operate a predetermined number of units according to a schedule which should be agreed upon prior to signing the ADA. Typically, if the ADA requires the Area Developer to open and operate five units in the territory then, depending on the franchise, the schedule may be one unit per year for five years. To become an Area Developer, you must pay a development fee, which many times is less than paying a full franchisee fee for the same number of locations, which can range from full price for the first unit and half price for each additional unit to a flat fee for the entire territory taking into account the predetermined number of units the Area Developer is required to create.
When considering an ADA, you must weigh the pros and cons in relation to your personal and financial status and goals. If you are willing to abide by a strict schedule with the Franchisor regarding the opening of the units, then an ADA may be right for you. However, if you are looking to focus on one store at a time and make that single store the best around, then you may want to look at a single-unit franchise.
Many entrepreneurs see the benefit of an ADA lying in the fact that negotiations can be made to reduce royalties which can, in some cases, pay for the units over time. Many others see an ADA as a mechanism for locking in prices for future franchise fees, royalties, advertising rates, etc, all of which have a tendency to increase, sometimes drastically, over time as the franchise system becomes recognized across the country and more successful. Even still, others see an ADA as the perfect method for protecting their interest in a certain area and helping to establish and expand the brand while making a good living for themselves.
One thing to remember is that by utilizing an ADA you may be forced to hire managerial employees to oversee your units as you run between them. This reality can be more than some Area Developers are willing to cope with, but in the long run, you have two choices in an ADA, manage all of the units yourself or hire trusted managerial personnel to help you.
For more information on Area Development Agreements, click HERE to contact us.
For further information please contact Jason@SheltonPower.com