Franchise Territories

During the franchise selection process, you will want to understand the nature of the competition for a given franchise. Who are the competitors and how strong is the competition in a given area? Franchisors recognize this and want to do whatever they can to reduce the competition for their franchisees. While franchisors have no control over where other businesses operate, they can control where their franchisees operate through exclusive and semi-exclusive territories. This is spelled out in Item 12 of the Franchise Disclosure Document (FDD). It is also specified in the Franchise Agreement.

A territory is the geographical area that a franchisee can operate in. The territories can be set up by city county or zip code boundaries, mileage radius from a given location, or population density. Franchisors will also consider demographic requirements for a territory.  These territorial restrictions are designed to give a franchisee a protected market large enough to be successful free from other franchisees in the system impacting the business.

Exclusive territories can be of different variations.  For example, a location-based business such as a restaurant or retail store will have a territory based on a mileage radius from the business location. A franchisor will not put another franchisee in that radius because it would be detrimental to both businesses.

For other types of franchises, such as service businesses, a franchisee will be awarded a territory based on one of the criteria mentioned above. Within their territory, the franchisee may have absolute exclusive protection meaning that no other franchisee can do anything in the territory. Or a franchisee may have the exclusive right to market in their territory. However, other franchisees are allowed to sell and perform services in the territory.

Some franchisors offer semi-exclusive territory protection. In this case, a franchisor will look at a given geographical area, such as a city, and decide how many franchises can be supported in that area. That is the number of franchises that will be allowed to operate in that territory. While the franchisees will be competing in the same area, this has advantages if the franchisees work cooperatively together. For example, the franchisees can take advantage of the economies of scale such as in joint marketing and advertising campaigns. Or the franchisees can help each other with respect to labor in work and job fluctuations.

Other franchisors may offer client exclusivity. In many business-to-business or referral-based businesses it does not make sense to limit a franchisee to a particular geographical area. In this scenario, the franchisee has exclusive client protection wherever that client’s services need to be performed. An example of this could be a business consulting or coaching franchise.

It is important to understand the territorial rights and restrictions of a franchise as part of the due diligence process. If you are investigating a location-based franchise, understand the franchisor’s rights with regards to changing the size of the territory. Can the franchisor add another franchise in the territory if it grows in population. Also, make sure you understand the territorial implications with respect to the prospective customer base of the franchise. For example, if a franchisor offers absolute exclusive territories, but the customer base is composed of referral customers. What happens when a referral customer of one franchisee needs to have work done in the territory of another franchisee? Obviously, the two franchisees will have to work together in a fashion that maintains a high quality of service that is not a hassle for the customers. It is incumbent on you to understand and discuss these issues with the franchisor and existing franchisees during the investigation process.

Please feel free to contact us with any questions. We are here to help.

Mark England