When you’re planning to grow your brand, the Area Development model (or Multi-Unit model) is a strategic path for rapid growth.
Why Multi-Unit Franchising?
An area developer (or multi-unit franchise owner) is a single person or group runs several outlets of your brand in a certain area. Multi-unit franchising can help your brand grow fast. It lets you cover larger areas quickly, giving your brand more exposure. Also, it lets you work with people who are dedicated, know your brand well, and have shown they can run your franchise successfully. They benefit from their knowledge of your system and economies of scale, and experienced franchisees can bring significant growth to your system. Would you rather work with 100 franchisees that own 1,000 outlets for 1,000 franchisees for those 1,000 outlets? Pricing and territory are two of the key factor of the Area Development offer.
Pricing for Area Development Franchises
For pricing, you generally have two options:
Discounted Flat Fee: Under a discounted flat fee structure, you charge a one-time fee for the right to open all outlets within a certain area. This fee is usually lower than what it would cost to open each outlet separately. Like a Groupon, a franchisee prepays for multiple units at a discount. If the franchisee opens all of the additional units, they will have saved money on the additional units franchisee fees. If the franchisee fails to open the additional units, the franchisor still benefits because it has received the fee up front (which is higher than the fee for a single unit).
Pros: This model is simple and easy to understand, making it attractive to potential franchisees.
Cons: The upfront cost might be too high for some franchisees.
Formula-Based Fee: Under a formula-based fee structure, you charge a development fee based on the number of outlets the franchise wants to open. For example, the development fee may be $10,000 per franchise. If a franchisee wants to open 10 outlets, they will pay a $100,000 development fee. When they are ready to open an outlet, they will pay the initial franchise fee less the $10,000 development fee.
Pros: This model can encourage franchisees to open more outlets because of the lower upfront fee.
Cons: This method can be more complex and harder for franchisees to understand. Also, if the franchisee opens fewer outlets than planned, you might end up with less in fees than if you went with a discounted flat fee model.
Protected Territories for Development
You may choose to offer a protected territory with your area development franchise offer. You would provide an area developer with a reserved “development area,” which generally includes a development schedule with quotas and timelines for entering into additional franchisee agreements. These quotas and timelines prevent an underperforming franchisee from tying up an area for an extensive period as the franchisor typically has the right to terminate the agreement and reclaim the development area if the franchisee does not meet its development quota. Granting a development area provides a franchisee a reserved area to scale operations. For instance, a development area allows franchisees to open centrally located commissaries or operations centers for multi-unit operations. The reserved area can be an incentive for prospective franchisees who want to target a specific area. If you don’t offer a protected territory, the area developer can open additional units anywhere they want so long as there is not another franchise in that immediate area.
Pros: A protected territory can make your franchise more attractive since it guarantees less competition in the area and allows franchisees time to develop the area. Franchisees may also be willing to invest more in their outlets, knowing they have exclusive rights in that area.
Cons: Offering a protected territory can limit your brand’s growth. You may end up turning away other potential franchisees interested in the same territory who are more qualified or more likely to open the additional units while the area developer fails to open any additional outlets.
In the end, figuring out how to price your franchise and whether to offer territory protection are big decisions. These choices can really affect how your brand grows. It’s all about finding the right balance – you want to make your franchise attractive to others, but you also want to make sure your brand can grow as much as possible. Remember, there’s no one-size-fits-all answer. What works best will depend on your specific situation. And, it’s always a good idea to chat with an expert or lawyer who knows about franchising to help guide your decisions.