One of the more innovative methods of expanding a franchise system into new territories that has arisen recently in the franchising industry entails reaching an agreement with a so-called "regional representative."
Smaller and middle-sized franchised systems typically encounter administrative strains in successfully working through leads, disclosing prospective franchisees, training franchisees and providing opening and post-opening support to new franchisees.
A regional representative is exactly what the words imply, a persona for the franchisor in a given territory, assisting in developing the franchised system for the franchisor as needed.
A key component in the arrangement is that the regional representative agrees to open and operate at least one unit or office to serve as a prototype in the territory.
This unit or office then serves as the showcase for prospective franchisees.
The regional representative can also provide assistance in working with leads, disclosing prospects, training and providing operational support.
These additional functions can be devised as needed, according to the strengths of the regional representative and the best way to benefit the franchisor.
The main benefit of the regional representative is that the startup costs can be significantly less than the costs involved in purchasing a master franchise or area development rights.
For example, a regional representative can be compensated with a percentage of initial franchise fees and royalties paid by franchisees.
That would ordinarily provide significant incentive for the regional representative to help develop the territory.
A fee for the rights to the territory compensates the franchisor.
In such an arrangement, there is an added benefit to both parties because the regional representative also has an investment in the franchisor's business by simultaneously operating a franchised unit or office.
A regional representative will typically be far more effective in developing the territory than a run-of-the-mill broker.
A qualified and trusted regional representative can lend valuable assistance to a franchisor in working with leads, training and providing support to franchisees.
Those functions can contribute significantly to the overall success and profitability of the system.
The barriers to entry into the arrangement with a regional representative are also lower than in more traditional master franchise relationships or area development arrangements.
In master franchise or area development arrangements, franchisees or developers typically pay large up-front fees.
With an area regional representative, the representative can pay a reduced fee for the territorial rights, but make profits on the initial fee and royalty split later.
Before automatically assuming that the right master franchisee or area developer will solve the equation, any franchisor with significant target territories for expansion should take a close look at the regional representative concept.
Gerald A. Cook is an attorney with the DKW Law Group. His practice includes representing franchisors and other businesses in complex business and commercial matters, including franchising, distribution and licensing transactions. He has also handled franchise registration, disclosure and dispute resolution as general counsel for a leading national franchise company. He has extensive experience in all areas of franchising including real estate and financing. He can be reached at gcook@dkwlaw.com.
