Most people understand the basic single or multi-unit franchisee who signs a franchise agreement with a franchisor to operate the brand in one or more territories. The next step up in complexity is the Area Representative Agreement, commonly known as an ARA, and the Master Franchise Agreement.
Area Representative Agreements relate to the designation of an “area developer” for a proscribed territory. Area representatives will typically establish or operate their own individual franchise unit that will double as a training facility, but their main business is to sell individual unit franchises on behalf of the franchisor. The area representative may also train franchisees 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 in a portion of the royalties collected from the franchisees in the area representative’s territory. But the formal legal relationship is between the franchisor and the unit franchisee.
The master franchise is the most complex of ownership options. This type of ownership is less common as a way for domestic franchisors to grow within the U.S. and is more often used for domestic franchisors to grow internationally, although there are a few master franchise offerings within the U.S. The master franchisee is granted the legal right to sign franchise agreements with sub-franchisees. Essentially, the master franchisee steps into the shoes as the franchisor and maintains a direct relationship with franchisees, creates their own FDD and issues their own franchise agreements.
The key differentiating factor between an area representative and a master franchisee is that the Master Franchise Agreement grants the master franchisee the right to become the franchisor in an area that they are authorized to offer sub-franchises. The Area Representative Agreement is just that, a “representative” of the franchisor locally acting on the franchisor’s behalf and sharing in the fees collected.
For franchisors offering an ARA, they must have two FDDs, one for the unit offering and one for the ARA. The franchisor offering a master franchise must have one for the master franchise offering and then they will typically have an FDD template for their master franchisees to use to prepare their FDD locally.
Tom Spadea
Tom Spadea is a franchise attorney and founding partner of Spadea Lignana, one of the nation’s premier franchise law firms, representing over 300 brands worldwide, from emerging concepts to elite brands that are household names. Spadea is a Certified Franchise Executive, speaker, author and key adviser to many high-level executives and entrepreneurs in franchising. spadealaw.com, tspadea@spadealaw.com