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The Importance of the Franchise Territory

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When prospective franchisees discuss their franchise territory with the franchisor, the focus is usually on the size of the territory. However, there are other important considerations. This article will explain what they are.

It’s been my experience that franchisees tend to focus more on the size of their prospective territory rather than on other factors. Territory size is a compelling topic in franchising. Many franchisees are under the misconception that the larger the territory the more insulated they will be from fellow franchisees and the greater the potential for added growth.

The franchise territory represents the foundation of the business. With few exceptions, it’s where your customers, revenues and future growth will come from. If the territory is too small it can make growing sales more difficult. It could also allow for a fellow franchisee on the border of your territory, to vie for customers in your territory. Large territories can be difficult to develop and may require added resources. Some franchisors have performance requirements in their franchise agreement that differ depending upon the size of the territory.

When you and your attorney review the Franchise Disclosure Document focus on how the territory is defined and what rights are held by the franchisee and franchisor.

Here are key items to focus on regarding territory

Definition of the Territory- How is the territory defined? Some are defined by population or zip codes, while others may be defined based upon specific demographics. Some franchisors actually provide a highlighted map depicting the franchisee’s territory. If the franchisor does not have a detailed and consistent method for identifying and defining territories, this lack of detail and consistency may exist in other parts of their operation. If a franchisor provides a very small territory it may indicate that the franchisor is more concerned about selling franchises and would have little problem placing franchisees right next to each other.

Exclusive Territory-Franchisors grant exclusive or protected territories to their franchisees to facilitate franchisee revenues and motivate market development by franchisees. However, an exclusive territory may only prevent the franchisor from allowing another franchisee in the same territory. Be careful about the configuration of the territory. A franchisor could allow another franchisee to open on the border of your territory thus accessing your customers. Be sure to determine exactly what “Exclusive Territory” means in the context of your franchise agreement. In some cases a franchisor may grant a first right of refusal for an additional territory or franchise.

Restricted Territories- A restricted territory means that a franchisee is prohibited from marketing outside of their territory. This is to prevent franchisees from encroaching into another franchisee territory. Many times a franchisor will allow a franchisee to market or sell into an “open” territory until it’s franchised. Be sure to determine what happens to the customers you gained if the “open” territory is franchised. Some franchisors require franchisees to relinquish the customers while others allow a franchisee to retain them.

Franchisor Internet Sales- Some franchisors reserve the right to sell directly to customers regardless of where the customers may reside. With the advent of E-commerce this practice has become more prevalent. In certain franchise concepts franchisor Internet sales could erode a franchisee’s profitability. Reserving the right to sell to some customers within the local franchisee's territory can result in franchisor conflicts with existing franchisees. The franchisor should have procedures to avoid such conflicts, including the payment of compensation to affected local franchisees.

Alternative Distribution Channels- In some cases the franchisor may reserve the right to sell through other locations such as supermarkets and other retail outlets. This practice could result in a situation whereby the franchisor is supplying a franchisee’s competitors with the same products or services the franchisee is selling.

When franchisees perform due diligence on a franchise program and the franchisor, it’s important to fully understand and evaluate the determination and definition of the franchisee territory. In addition, you and your attorney have to be fully aware of the rights retained by franchisees and the franchisor regarding territory.

2015 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow.com and Chief Operating Officer, FranchiseGrade.com. He is a former franchise executive and franchisee. He can be contacted at 631-246-5782 or at  franchiseknowhow@gmail.com

 

 

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