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Franchise Territories

Estimated reading time: 5 Min Read
Franchise Territories-1

While franchising undoubtedly offers a recipe for success that transcends various industries, the practicalities of all business models still apply. Just as a street saturated with outlets selling the same wares will undoubtedly incur reduced profitability for all of them, so franchisees for the same business operating within the same region will inevitably eat into each other’s income, a circumstance that benefits neither the franchisee nor the franchisor. It was for the purpose of combating this market universal that the concept of franchise territories came into being. 

The intent of the exclusive territory is to protect your business sales from being cannibalized by other locations offering the same products and services in close proximity to your location. Such encroachment could detract from your business sales. By awarding each franchisee a different territory, the franchisor minimises the risk of competition between them and thus maximises profitability both for themselves and the franchisees. 

How territories are decided upon

Once a franchisor decides to enter a country or area, how they divide it into territories is contingent upon their business and the market in which they operate. Some are assigned by geographic lines, whereas others are decided by population size. Some take a more in-depth look at the demographics of a region to deduce whether or not it contains enough suitable customers, and some are even built around the franchisee rather than the reverse. When taking a geographic approach, the franchisor might look at a market such as England and divide it into territories before searching for franchisees to operate within these areas. 

While size might seem like the most obvious criterion by which territories should be decided upon, it can also be misplaced; one of the most common mistakes that franchisors make is to create territories that are too large. At first they may decide to divide a large area into a certain number of territories, only to reassess as their business continues to evolve and conclude that more franchisees may be necessary, requiring them to buy back a portion of the allocated territories from franchisees. Consequentially, franchisors must consider information from all sources before settling on the size of their territories.  

Over the years franchisors have grown significantly more sophisticated in their decision making process, striving to create territories that can guarantee a strong revenue stream for their franchisees. External help is often sought in this regard. 

What to look for in a franchise territory

When it comes to territories, bigger doesn’t always mean better. As a franchisee, you could have a territory the size of the Sahara at your disposal, but if it’s as devoid of target customers as the Sahara is of water, your operation will still struggle. Ergo, an area well populated by your target demographic is of paramount importance for any franchisee.

The shrewd franchisee will ask their franchisor about the territory they are about to inherit: how did they decide upon the size and location of this territory? Does it have a good conversion rate? Are other franchisees succeeding based on the same territory rules applied elsewhere? Because if so, then you know you’ve got a franchise with a successful territorial strategy and one that can generate you a substantial income. 

What you get with your territory

Due to European competition laws, there is no basis for preventing a neighbouring franchisee from selling within the territory of another. However, the terms of the franchise agreement dictate that said franchisee cannot market themselves outside of their assigned territory. In other words, upon acquiring a territory, you alone will be able to market the company’s products/services within that defined area. 

Exclusive territories

Many, but not all, franchises grant an “exclusive territory” to their franchisees as part of the rights given under the franchise agreement contract. The purpose of doing this is to assure the franchisee that they will have some area in which they can market and operate under the franchise brand without any competition from another franchisee or even the franchise company itself. This territory is normally described in geographical terms although it can also be described as a specified radius originating from the actual location of your unit.

Regardless of whether you are granted an exclusive territory, you need to ensure that the area is large enough and has a sufficient number of potential customers to enable you to build a successful business for yourself. 

Non-exclusive territories

It shouldn’t be assumed that an exclusive territory is always critical for success. The nature of the franchised business may be such that the franchise is not particularly vulnerable to local competition. Just look at the close proximity of the same fast food outlets in urban areas.

Some examples of the questions you need to ask

  • What is actually excluded/ protected? Franchise agreements sometimes don’t preclude franchisors from selling goods or services through alternative channels of distribution, such as online.
  • Can a postcode change reduce the territory? It’s important that franchise agreements contain language guarding against changes in postcodes.
  • Are miles measured by driving distance or radius?
  • Is the territory provision really exclusionary?
  • What are the franchisor's intentions for the bordering territory? Might this have an impact on your territory?
  • Can the protections be eliminated for any reason (eg failures to timely pay royalties and other defaults (even minor ones), and failures to meet quotas)?
  • Are there other competitors in the franchise territory? How close in proximity are they? What competition is projected in five or 10 years' time?
  • Is the franchise territory large enough? Will there be enough customers to make the franchise a success?

Seek advice if you’re not sure

Reputable franchisors are as concerned about encroaching and cannibalisation of locations as the franchisee is. The franchisor also has a legal responsibility to act in good faith and fair dealings. The specific territory and protected area policies and terms should be outlined in the franchise agreement, but with it being such a complex issue it requires carefully reading of all the terms and conditions so that you have a full understand of just how protected your territory is. Have a lawyer who is familiar with franchising assist you and talk to existing franchisees to understand how territory issues have been dealt with by the franchisor in the past.

It's important to understand the nature of any territory rights that are given to you and any conditions or restrictions that apply. This involves understanding not only the franchise agreement but the commercial considerations about how the business operates and what type of territory rights are appropriate.

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