Exclusively Yours

Getting Specific

Does it make a difference if the franchise is a retail or service business?

The same issues are going to be present whether you're talking about a product or a service.

Let's assume the franchise is for maid service in a home. Franchisees have to put together groups of people to provide the service, and I don't see why franchisors would interfere with a particular franchisee's exclusive territory in the providing of that kind of service. But if it's the kind of service that can be provided online, for example, or by telephone, information service or something like that, claims of encroachment are possible.

When franchisors establish an express location in a gas station or sell in grocery stores, does that violate a territory?

Again, we have to look at what territory, if any, has been given. One of the interesting things about [encroachment] law is that some states are now saying it's unlawful for a franchisor to "compete unfairly with a franchisee within a reasonable area." The terms "reasonable area" and "compete unfairly" are going to be subject to the type of franchise, the location, how many people pass by and what has happened since the opening of this alleged unfairly competing franchise store or company store.

Is this an issue that will divide franchisees and franchisors? Is it something they would take sides over?

Usually exclusive territory isn't an issue franchisors and franchisees who are already in a relationship get involved in. And if a prospective franchisee doesn't like the franchise agreement because it doesn't provide for an exclusive territory, he doesn't become a franchisee. However, a franchisee may decide, based upon the franchise agreement and advice of counsel, even without an exclusive territory, "I'm going to with it anyway. It's a good franchise, and this franchisor has treated its franchisees well, and I'm willing to rely on the statutes that exist, and that may hereafter exist in my state, to protect me in the event that a franchisor does compete unfairly with me in my reasonable area, even if I don't have any exclusive territory. And I'm willing to take the chance that the franchisor won't sell a franchise to another franchisee in my reasonable area, even though I don't have an exclusive territory, because of my knowledge of the franchisor."

In the process of settling a class-action lawsuit, GNC brought up the issue of violating exclusive territories, not only because they were building company-owned stores near franchise locations but also because the company-owned stores got their products for a lot less and were able to charge lower prices than franchisees. Does pricing come into an exclusive territories deal?

I don't know that that's an exclusive territory issue, although, depending on the case, the unfair treatment concept with respect to obtaining goods at lowered costs might be involved with an exclusive territory or an encroachment matter.

Does having or not having an exclusive territory affect a franchise's success?

Some franchisees who don't have an exclusive territory might feel the pressure of other franchisees in their area; some would be impacted negatively. Other franchisees might treat it as a challenge and rise to the occasion, becoming the preeminent franchisee in their particular area. So it all depends on the basic personality and drive-and the resources-of a particular franchisee.

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