As a franchise attorney, I see franchisees with many different goals. Some franchisees are happy with one store, while others are intent on building an empire. There is no right or wrong way to participate in the franchise world. However, choosing the right vehicle for expansion is important, and there are several vehicles to choose from. In the next several weeks, I will discuss some of the methods to assist with franchise growth and development, including their benefits and weaknesses.
Area Development Agreements
One way to expand is to sign an area development agreement. Under such an agreement, the franchisee is afforded the right to open multiple locations within a certain “area.” For example, a franchisee might be given the right to open five locations within Fairfax County, Virginia in five years, at a rate of one new franchise per year. When an area development agreement is signed, the franchisor typically removes the designated area from the market so that no other franchisees are placed there by the corporate office. The franchisee has the exclusive right to develop this territory for himself and does not have to fear other franchises popping up in close proximity.
However, while area development agreements are a great way to lock in territory and keep other franchisees out, they are not without risk. Most area development agreements obligate the franchisee to develop the territory pursuant to a schedule. In the above example, the franchisee was obligated to open one new store per year. If the franchisee fails to meet its obligations, it risks losing the right to continue developing the territory, and in some cases risks losing all other franchised outlets as well. Because of the obligations discussed above, area development agreements are not appropriate for everyone. And those seeking to enter into area development agreements must be sure they are not risking too much.
In the next post, I will discuss what is known as an “option” agreement.
If you have any questions about franchise law, please contact Brian Loffredo at
ABOUT BRIAN LOFFREDO
Brian is a commercial litigator with more than seventeen years of experience representing clients in the franchise industry. Brian routinely assists clients during the licensing and franchise/FDD review process, as well as with the resolution of franchise-related disputes, including those involving terminations, territorial disputes, fraud, disclosure/relationship law violations and breaches of contract.
In addition, Brian represents and counsels clients in the construction industry on matters involving litigation, construction defects, licensing and compliance, collections, mechanic’s liens, payment bond and Miller Act claims, contract drafting, and compliance with home improvement laws and other construction industry laws.
Brian also has extensive experience representing financial institutions with workouts, collections and residential / commercial foreclosures.
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