Area Representation: A Franchise Territory Primer

During this edition of FranNet’s blog, we’re going to take a look at franchise territories. One of the tenets of franchising, in general, is that you, the franchisee, will own and operate your business in a protected territory, in which no other identical competitors can compete. This “exclusivity zone” to operate your business is standard in all franchise agreements, however, the proprietary terms of this section must be reviewed and understood. It’s a big part of your due diligence on the way to becoming your own boss, so let’s look at a few pointers on this subject.

The Franchisor is Obligated to Define

The issue of territorial rights is so important to the operation of a franchised business that your franchise agreement dedicates an entire section to defining exactly what it means. The industry term for it is “Item 12”. Item 12 includes all information on your proposed territorial rights and restrictions. Item 12 should plainly define your exclusive territory or exceptions to your exclusive territory. Make sure you have a clear understanding. It may be a three-mile radius. It may be five. There may be a caveat. If you have a question about the definition, be sure to ask. The time to address any misconceptions is prior to you signing the franchise agreement. Always seek professional counsel if you’re unsure. 

Demographic Basis Borders

Exclusivity in a particular territory can sometimes be defined by demographics rather than square miles. This means that the franchisor is using the mapped household data in a defined area. However, as we all know, neighborhoods and areas of town to change, gentrify and otherwise become altered by market forces over time. Some populations increase and others decrease. It’s always safe to inquire as to what the franchisor’s contingency plans are for protecting your consumer base in the future, if the situation is warranted. 

What is First Right of Refusal?

An issue that typically comes up when discussing territorial rights is first right of refusal. There may be some franchisors who offer this option. What it does is give you, the franchisee, the option to expand your own territory (perhaps adjacent, perhaps not) before any other franchisees, if availability comes online. 

Contingency Planning

We all know that in the world of fast-paced business, the market landscape for your franchise location can change. Mergers and acquisitions of your brand could affect the territorial rights set forth in your contract. Many franchise attorneys recommend that contingency agreements be spelled out to protect you, the franchisee, in such a situation. Find out what the plan is and how you will be compensated if your territory becomes altered from your original agreement.

Having a specifically defined territory of operation is endemic to franchising and a core benefit to the business model. If you’re allowed to operate in an unfettered manner, you can easily put plans in place to capture your consumer base and work without direct competition from within the brand’s own footprint. It’s very important to remember that Item 12 is a crucial section of your franchise agreement.

At FranNet, we always recommend a measured approach to doing your due diligence and understanding exactly how your new business territory will be defined—and protected.

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Mar 21, 2018