Franchising is appealing to franchisors because it provides for fast business growth with immediate income in the form of upfront payment of franchise fees for the franchisor, without bearing most of the day to day business expenses borne by the franchisees and with much less overall risk. For franchisees, the business arrangement is equally attractive because franchisees often can capitalize on their entrepreneurial skills without having to start a brand from scratch, which generally leads to a higher success rate than starting a business with no foundation.
It is common for franchisors and franchisees to work with area representatives. These individuals are not parties to the franchisee’s individual agreement with the franchisor. Rather they have a separate agreement with the franchisor that usually allows them to work in a certain geographic area for the benefit of the franchisor and its business or system. Area representatives typically search for ideal franchisee candidates and, in systems where the franchisees need storefronts or other physical space from which to work with customers, appropriate locations. They also often provide training, marketing and growth support.
Why the relationship works for franchisors
Franchisors tend to benefit from working with area representatives in a few different ways. The following aspects of the franchisor/area rep relationship often make the relationship a good deal for franchisors:
- Franchisors save on personnel costs at the home office
- Franchisors do not have to send employees into the field
- Area reps receive pay only after they are successful
By controlling overhead, franchisors have more capital to use on other endeavors. This may be particularly important to franchisors that want to devote as much capital as possible to growth efforts.
Franchisors may incentivize area reps to maximize the number of franchisees and locations in the geographic area the reps service, but may also expect the area rep to share financially in any losses the franchisor suffers due to franchisee default or failure. This balance can contribute to efficient and responsible system growth.
For their services, area representatives usually receive a portion of the initial franchise fee and ongoing royalties. This portion is often between 40% and 60%, which means area reps have an interest in developing and retaining successful franchisees.
How the relationship can also benefit franchisees
Working with area representatives can be equally advantageous for franchisees. Specifically, because area representatives have a financial incentive in successful franchisor-franchisee deals, the franchisee is likely to benefit from extensive support and expertise. Put simply, as the Small Business Administration notes, the area representative has a genuine reason to see the franchisee succeed.
Ultimately, to ensure they are receiving a fair deal, franchisors, franchisees, and area representatives may all require independent legal counsel.