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Development Agents: A Blessing or a Curse?

by Ed Teixeira

A number of franchisors look to development agents for increased system growth. Despite the benefits this approach can provide, there are also a number of drawbacks.

The sale of new franchises continues to be primarily via the sale of unit franchises, whereby the franchisee acquires the right to operate a single franchise in a specific geographic territory. A unit franchise strategy provides the franchisor more control over the selection and operation of the franchise and only one territory is at risk versus a large geographic area. The franchisor can more readily control the expansion of the franchise network and dealing with a smaller unit franchisee may be easier compared to a large well capitalized operator.

For a number of years, franchisors, especially in the food segment, have encouraged and some even required a multi-unit franchisee, where the franchise entity agrees to develop a minimum number of locations in a market. This approach allows for well capitalized franchisee entities to build brand awareness in a market and obtain favorable purchasing arrangements from vendors.

A franchising model that has gained popularity is the development agent program. Under this arrangement the development agent is an individual or franchisee having the rights to develop a particular region or territory. The developer is usually responsible for marketing and selling new franchises, providing training and on-going support. For these services they receive a portion of the initial franchise fee (50%) and the on-going royalty (40-50%). The individual franchise agreement is between the franchisor and each individual franchisee. The developer pays an initial fee for the territory or region which could range from approximately $100,000 to $250,000 or more. The developer then has an investment in their initial franchise and the development rights to a territory. The dramatic growth of the Subway franchise network has been attributed to its Development Agent program, which is similar in concept.

Benefits of the Development Agent Strategy:

The ability to achieve faster growth using well funded developers
Outsourcing franchisee services to the development agent allows a franchisor to digest a faster rate of growth without a diminution of services
Maximize advertising budget and franchise leads by having a larger geographic area to franchise
Share the franchise development costs with the development agents
Maintain the contractual relationship with the franchisee. If the development agent is terminated the franchise contracts remain in force between the franchisor and franchisee
Introduce and promote the franchise brand into more markets

Disadvantages of using Development agents:

If the development agent fails or creates problems, the franchise brand and image can negatively impact a large region or territory
Particular franchise concepts work better than others under a Developer program. A good rule of thumb to follow: the more complex the franchise operation the riskier a Development agent program.
A start-up or newly emerging franchisor may use development agents before the franchisor has gained adequate experience regarding their franchise operation.
By virtue of the financial arrangement between the franchisor and development agent some developers may not retain enough of the franchise fees to fund on- going growth. Hence the need for well capitalized developers
The franchisor is delegating significant responsibility and control to the developer. If the developer fails the franchisor will bear a certain amount of responsibility in the eyes of the local franchisees.
Since the developer shares a portion of the initial and on-going franchise fees, this arrangement could lead to conflicts between the franchisor and developer.
Developers may be undercapitalized which prevents them from meeting their performance goals. It can cause them to recruit marginal franchise prospects.
Franchisors rely upon developers for training and support. A weakness in these areas can adversely affect both franchisee and franchisor.

A development agent program can be an effective way to grow a franchise network provided that the franchise concept is properly designed and implemented. It can provide an opportunity for a franchisor to build a franchise network over a larger geographic area in less time. Conversely, there can be drawbacks to this strategy depending upon the franchise program and its operational requirements. A number of franchisors have introduced a development agent program only to abandon it in favor of the more traditional unit and multi-unit concepts after experiencing problems.