Understanding Exclusive Territory in Franchising

I received some questions based on my last week’s article on Franchising, specifically around the area of exclusive territories. After more research and asking some friends into the franchising world, I got some new learnings to share.

When you buy a franchise, you’re buying real estate. But, we’re not talking about buying an actual building. Instead, it is the geographical area you get as a franchisee. Your territory. Your franchise & market "real estate."

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 (area code, street or waterway boundaries) though it can also be described as a specified radius originating from the actual location of your unit.

"Exclusive territory" is a frequently misunderstood term. Franchisees often misunderstand the rationale that applies to the size of a territory and consequently insists on a territory that is too large which can be a detriment, rather than a benefit, to them. The size of any exclusive territory does not dictate the ultimate success of the unit.

A franchise system can be destroyed by awarding too many franchises in one area - or too few. Too many franchises in one area may starve them of business if there are not enough customers to support every franchisee.  On the other hand, although a franchisee does not want to be competing directly with other franchisees in their area, the franchise units should be close enough to take advantage of the synergy that is created when a number of units are operating in close proximity.

If you want to build your brand into a franchise system, then this is something that needs to be planned ahead. Your goal is not only limited to growing your market share but also ensuring that the franchises issued do not cannibalize other franchises temporarily or permanently. And if such an encroachment happens, you need to manage this as well especially if you have company-owned units.

This is where the limits of a franchise become glaring, and if you want to be a franchisee, you need to read through and understand the franchise contract not just once or twice. Every business action may be limited by exclusive territory clauses such as marketing and advertising. And what we are talking about here is limited to brick & mortar franchises, other industries may have more nuances to them.

Conclusion: do your due diligence

Whenever you are evaluating any franchise, be sure to ask the existing operators whether they feel that the territory structure is fair and reasonable, and ask them whether there is an appeal process in place to allow for the resolution of any new unit impact conflicts without having to resort to litigation. These types of steps can help ensure that you are selecting a franchise with a strong sensitivity to these sorts of potential issues.

Whether or not a fixed exclusive territory is appropriate will depend on the specific type of franchised business. Make sure you have a complete understanding of what your territory includes, and doesn’t include before you become a franchisee.

Do not be blinded by the sales talk & promises of getting rich!

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