Area Development and Representative Agreements;
Sub-Franchisors and Master Franchisees
By Matt Dickstein
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In this article I explain franchise law for area development, area representatives, sub-franchisors and master franchisees. In brief, the main differences between them are–
* The area developer is a big franchisee
* The area representative is a little franchisor
* The sub-franchisor (aka master franchisee) is a country-wide franchisor for an international franchise system.
Area Development Rights
An area developer is a franchisee who is contractually bound to open multiple franchise units in a given area over a given period of time. In other words, an area developer is a unit franchisee who must operate more than one unit (a big franchisee). Compare a single unit franchisee who may, but is not obligated to, purchase another single unit. The area developer only operates franchises; he has no right to sell unit franchises.
Area Representative Rights
An area representative has the right to sell franchise units, and has responsibility for assisting and supporting the franchisees to whom he sells units. The area representative can also own his own franchise shop, and usually does, but this is not necessary to being an area representative. Even though we can think of the area representative as a little franchisor, he does not enter into a franchise agreement with the franchisee. Only the franchisor and franchisee sign the franchise agreement.
The area representative pays an up-front fee to the franchisor. In return, the franchisor gives the area representative the right to sell unit-franchises on behalf of the franchisor. The unit-franchisee pays all initial franchise fees, royalties and other payments directly to the franchisor. The franchisor then remits a portion of these fees to the area representative as negotiated in the Area Representative Agreement. In sum, the area representative pays money up-front to the franchisor, then after the area representative sells unit-franchises to franchisees, he participates in the franchise fees paid by the franchisees to the franchisor.
Sub-Franchisor Rights, aka Master Franchisee
A sub-franchisor steps into the shoes of the franchisor and acts as the franchisor in a given area (usually a country). The sub-franchise (aka master franchise) structure is used for international franchising where the sub-franchisor is responsible for an entire country.
A sub-franchisor sells its own sub-franchises within the country. The sub-franchisor directly enters into a franchise agreement with a sub-franchisee [compare with an area representative, who does not sign the franchise agreement]. The ultimate franchisor is not a party to the sub-franchise agreement.
The sub-franchisor has its own, separate contract with the ultimate franchisor, which contract specifies the terms of the relationship, including the territory and schedule for selling sub-franchises.
Compare: Franchise Broker
Finally, lets compare all this with a franchise broker. A franchise broker is an independent sales agent not employed by the franchisor. The broker solicits franchisees and receives a fee from the franchisor on the sale of the unit-franchise. At that point, the franchise broker walks away.
Unlike an area representative or a sub-franchisor (both of whom also sell unit-franchises), a franchise broker does not pay money to the franchisor, nor does he act as a mini-franchisor or participate in ongoing franchise fees. A franchise broker does not have an obligation to sell franchises nor to service and support the franchisees. The franchise broker gets paid a commission for his sale, and that’s the end of it.