What’s a development agreement?

John Pratt writes:

It’s an agreement that allocates a specific territory to a franchisee - almost always on an exclusive basis - in which the franchisee is entitled to open a specified number of franchise outlets.

These arrangements have become increasingly popular, especially in the fast food or casual dining sector. Franchisors argue they are better off investing their limited resources in recruiting franchisees who have the desire and wherewithal to open a significant number of franchised outlets, rather than having to deal with individual franchisees. In addition, franchisors believe, with some justification, that the quality of these franchisees is higher than those who only wish to open one outlet.

The challenge for franchisors is not to allocate an exclusive development area to a franchisee who fails to open the required number of outlets. It is for that reason that development agreements will contain a schedule that a franchisee must meet in order to retain exclusivity and thereby open further outlets.

Usually, development agreements are relatively short and are in addition to the more detailed franchise agreement. An area developer then has to enter into a franchise agreement for each outlet opened under the development agreement. Alternatively, in some cases franchisors incorporate the development obligations into the franchise agreement itself, but that is unusual.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.