One of the most critical parts of your franchise agreement is the territory where you will run the business and how that area is defined. Whether you want to open a home-based service franchise or a retail location, you will be looking to the neighborhoods around for clients and your income.
Similarly, franchise companies will want to make as much revenue as possible in any particular area. To achieve this, they provide different kinds of territory protections:
Exclusive territory. If your franchise agreement states that you have an exclusive territory, it means that you have been given the right to be the sole source of the franchisor’s products or services in the specified geographical area. The aim of an exclusive right is to make sure the franchisee’s market is large enough for them to succeed and small enough for them to operate effectively and efficiently. A lack of territorial definition can lead to a huge business risk for owners of certain franchises by causing them to become overwhelmed. In many cases, the franchise territory will be defined by zip code or radius from away your business location.
Protected territory. In the case of a protected territory, the franchise owner is also given an area to operate in. But the franchisor will allow customers to get their products or services from that area through other means of distribution, e.g., buying directly from the company online. When reading the franchise agreement, find out if there are any present and possible exceptions regarding your territory protections to avoid unfair encroachment into your area. Although this may not seem ideal to you, remember that a franchisor won’t want their franchise units to fail and probably have several reasons to believe that your location can succeed under this arrangement.
Unprotected territory. Not all franchisors provide territorial protection to their franchise owners. Under this arrangement, franchise locations can enjoy the benefits of being close to one another. Plus, the brand gains more recognition as the number of locations increases. If this is the case with the franchise system you are interested in, it’s important to ask about what the situation will be in the future. What occurs when your profits reduce significantly because of a franchise location near you? Will you be offered the first right to buy a new territory whenever the franchisor decides to provide territorial protections? A franchisor wants to make as much money as possible from its franchise locations. So, they may choose to set up new stores as it deems fit to increase their bottom line.
Some Grey Areas to Think About
Unsold territory. In most cases, you are free to encroach into unsold territories close to you until they are sold to another franchise owner. Speak about this possibility with your franchisor in advance. It’s possible that your customers in that area will be handed over to the new franchise owner. But based on the kind of franchise, you may be able to retain those customers if you were the first to sell the franchisor’s goods or services to them. It’s crucial to understand your franchisor’s policy regarding territory, so you can operate your business properly. Nobody wants to put in the effort to gain customers, only to lose them to another franchisee.
Regardless of how a franchisor determines territories, it is important to know how their territories are defined and whether they are properly followed. Speak with current franchisees to know if they are also okay with the territorial structure before making your decisions. Good franchisor support is essential for your franchise’s success, and one important aspect to look at as you choose your new franchise is the territory.
