What is Area Representative Ownership?
Area Representative Agreements relate to the designation of an “area developer” for a territory. Area Representatives do not typically establish or operate their own individual franchise units outside of perhaps one unit that may double as a training facility but, rather, sell individual unit franchises to prospective franchisees within the Area Representative’s proscribed territory.
Area Representatives will commonly train franchisees within the prescribed territory and monitor franchisee compliance on behalf of the franchisor. Simply put, the Area Representative is a commissioned sales and field support person for the franchisor who shares a portion of the royalties collected from the franchisees in the Area Representative’s territory.
Advantages of Area Representative Ownership
Advantages of area representative ownership include:
- Acceleration of income: The franchisor can sell large territories to build more capital quickly.
- Faster growth: Finding someone with a good network within a specific area will speed up the sales process.
- Added support: Having an Area Representative is like having another layer of management, and in this case, they are located closer to the franchisees. This can also help keep overhead lower.
Disadvantages of Area Representative Ownership
Disadvantages of area representative ownership include:
- Revenue trade-off: While the initial income from the sale of the territory is a great benefit, there is an impact on future revenues. Generally, the Area Representative is granted a portion of the franchise fees and royalties.
- Inconsistency: Some Area Representatives may not be as great about training. But having a strong training program with a clear manual can help mitigate that risk.
- Legal risk: The franchisor can be liable for the Area Representative’s actions, but there are ways to better protect this when drafting the initial agreement with the Area Representative.
- Risk of “freezing” an area: A franchisor may misjudge the potential number of franchises to establish in an area.
