Exclusive versus Non-Exclusive Franchise Territories: A Compromise
by Ed Teixeira
There are situations when franchisors should allow franchisees to conduct
business outside of their territory. Learn why the choice between exclusive and
non-exclusive territories is not quite as clear cut.
In a number of instances franchisor-franchisee disputes arise because of
territory issues. In some cases, a franchisee is granted a territory without any
defined criteria. One could consider this situation akin to a franchisee being
granted a location territory. In other words, the franchisee is granted the
right to open up a franchise in a specific location only. The franchisor could
grant a franchise to someone that could open up less than a ¼ mile away or the
franchisor may open a corporate location nearby and use their superior resources
to literally draw revenues away from the franchisee. Claims of encroachment can
then enter the scene.
article by franchise attorney Michael Einbinder provides a detailed look
into the issue of exclusive territories.
There is a school of thought that believes every franchisee should have a
true protected territory free from intrusions by other franchisees. However, I
take the position that there are situations where a franchisee should be allowed
to sell into another franchisee’s territory.
Franchise Concepts Where “Outside Territory Sales” Could be Allowed
- The franchisee markets
services to other businesses or consumers, whereby the franchise location,
unlike a retail business does not host customers.
- Typically these services
would include repair or construction services for residential and commercial
customers or B2B services, for example, business coaching.
- Each franchisee is granted
a clearly defined territory.
- There is a high probability
that franchisees may have a relationship with potential customers outside of
Reasons for Allowing a Franchisee to Generate Sales Beyond Their Territory
- Enables a franchisee to
capitalize on relationships they may have outside of their own territory. This
can benefit the entire network by increasing brand visibility.
- Allows for highly motivated
franchisees to generate additional sales.
- Facilitates franchisees
collaborating on projects.
- Can help generate regional
accounts with multiple customers or locations that can extend into other
territories. Note: some franchisors may opt to market to and control all
accounts with more than one location.
Controlling Franchisee Marketing Activities
- Establish a sales quota for
each franchisee territory.
- Any sales generated outside
of a franchisee territory do not apply to sales quota.
- Franchisee is not allowed
to actively advertise or market into another franchisee territory.
- Franchisee sales outside of
their territory must be approved by the franchisor.
- The franchisor doesn’t
market into franchisee territories from company locations or alternative
- Can require that the
franchisee generating sales from another franchise territory pay a fee to the
A compelling case can be made for granting franchisees true protected
territories with exclusive rights to market and generate sales limited to their
individual territory. However, there are instances, whereby allowing franchisees
to generate sales from outside of their territory, including another
franchisee’s territory, has merit. If proper and reasonable controls are in
place it’s possible that allowing franchisees the right to generate sales beyond
the boundaries of their territory can benefit the entire network.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC. He
can be reached at firstname.lastname@example.org