A restaurant franchisor client is considering entering into an area development agreement to develop 10 restaurants in California. While the use of multi-unit area development agreements mainly defines franchisee development obligations, this strategy has benefits for both franchisees and franchisors alike. Regardless of how and when the franchisor chooses to execute these agreements, the ultimate goal is to responsibly increase the growth of the franchise.
Restaurant Franchise Example
Our client is a New York based Chinese-Indian restaurant system that has expanded to Massachusetts and Connecticut. California is an attractive market for them for many reasons, including the development of ethnic malls. However, the distance is an obstacle in terms of training and management. Executing this type of agreement with a reliable, carefully vetted developer ensures that the restaurants to be opened in California will follow the system’s values of quality food and customer service.
While a multi-unit area development agreement gives a franchisee the rights to open and operate more than one unit within a designated region, it also provides the franchise system with a plan for growth stability. For a franchisor, knowing that a franchisee is following a schedule of controlled growth of the franchise brand throughout a region is important. Multi-unit area development agreements also save the franchisor time and money because they reduce (i) sales and franchisee training time; (ii) support needs due to less franchisees; and (iii) advertising costs.
The main benefits of multi-unit area development agreements for franchisees include initial rights to open and operate more than one location of the franchise in a designated area and lower franchise and royalty fees for opening multiple locations. These agreements give franchisees a competitive edge throughout a region and allow them to negotiate more desirable locations and schedules for opening their franchises. Franchisees may also save money on supplies and services by leveraging their numbers.
Growth for All
While single unit franchisee contracts have their uses, multi-unit area development agreements focus on responsible franchise growth and development by region, which benefits both franchisors and franchisees. Our client’s growth strategy and use of multi-unit area development agreements, particularly in its recent expansion to California, serves as a good example for employing these types of agreements.
If you are on either side of the franchise table and have questions about these types of agreements or anything related to franchise contracts, contact us to discuss your legal rights and options today.