Go through this blog and get every detail about why you should go for an area development franchisee.
There are different types of franchise agreements for single-unit franchisees. Area development franchise is one of them. It is also known as a Multi-unit development agreement. It is made by the franchisor that determines a franchisee must open a certain number of franchisees.
By entering this franchisee, you enter into a franchise contract to acquire more and more units. This agreement gives you the contract is alive. No other franchisee can open their franchisee in the same area.
Advantages of Area Development Franchise
Diversification – Many businesses open up their businesses to different franchise brands by adding some additional protection layer against the economic issue. It is like an investor who will balance out all the risky elements of the portfolio by purchasing different stocks and shares.
Exclusivity – Area developers can enjoy being the only franchise of the region for the term of their franchise agreement. This deal is profitable for all the areas which are significant for the business.
Reduced franchise fees – Many franchisors offer area developers financial incentives to open multiple units. Sometimes they even ask for the initial franchise fee but also reduce the fee for subsequent branches.
Reduced royalties – There are earning discounts on the unit franchise fee. With this, the area developer can take advantage of a lower royalty fee after establishing a certain number of locations. Generally, this cost is less supportive to area developers; thus, the franchisors can grant the savings to the franchisees.
Area Development Risks for Franchisors and Franchisees
Area developers have to go through many risks in one of the biggest risks for the franchisor is selecting an unsuitable franchisee, just like KFC Franchise, came in India. The franchisors have to trust the area developer for the unit management in an exclusive territory profitably and smoothly. If they do not choose a suitable franchiser, it will be difficult for them to reach out to the targets or the maintenance of the brand value of the entire business.
Generally, a franchisor can mitigate against the risks with a strong recruiting system. So the franchisors don’t have to fear selecting a suitable business partner.
Although, the franchisors can’t select the most reliable applicant to be an area developer. The future area developer of the area should ensure the franchise’s culture, objectives, and values should be assigned before the final signature on any agreement.
How do Area Development Franchise Agreements Work?
A multi-unit developer may agree to open five new locations for three years in a country. The multi-unit franchisee uses a non-refundable development fee to obtain the rights. This fee is frequently applied on a pro-rata or proportional basis.
Here we are taking the Bata Franchise Cost example suppose the initial franchise fee for the franchisor is ₹30,000. It requires a deposit of ₹15,000 for every additional franchise to agree with the multi-unit franchisee. Also, the multi-unit franchisee agrees to open at five locations. After signing the multi-unit development agreement, the developer will also have to sign their first franchise agreement and pay ₹90,000 to the franchisor. So, in general,
- The initial franchise fee is ₹30,000
- Deposit or developmental fee is four times to ₹15,000 that is ₹60,000
- The total payment will be ₹90,000
Every additional franchise agreement is signed; thus, the multi-unit developer will pay ₹15,000 to the franchisor.
The initial Franchise fee is ₹30,000
Less pro-rata portion of the development fee is ₹15,000
The total payment would be ₹15,000
What does the Type of Area Development Franchise Mean?
The area development franchise agreement allows the developer to protect a territory in which franchisees can agree upon several franchisees on a negotiated schedule. If the franchisee does not match the opening schedule, the area developer keeps the open dealer, and the franchisor takes the remainder of the territory back.
Do you aware of the Must Read Topic: Things to Know About Franchise Royalties Cover
Pros of Area Development Franchise Agreement
- This agreement allows the franchisor to grow their franchise program more often
- It is very easy and simple to operate such a Franchisor
- This agreement can work with an individual franchise agreement growing slowly
- It is more efficient for area developers to operate various locations
- People who are capable of managing funds if various franchises are supposed to be more sophisticated operators.
Conclusion
One of the best ways to ensure the exclusive building of franchisee units in a certain area is through an area development agreement. It ensures you can open the franchisee in a specific location within a specific time. It also benefits and controls the market. You have to deal with challenges along with operating multiple franchise units in the same place.
Read More:-
- Indian Franchise Agreement Format
- KFC Franchise in India 2022-2023
- What is Contract and Agreement?
- Business Ideas and Basic Cost
