How Do Franchise Territories Work?
By Jeff Elgin •
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I've been researching a retail franchise business and want to make sure that the territory I'm interested in would be exclusively mine. I've read a few testimonials about franchises not having clear rules in regard to this. How does it work?This one of the most important and contentious topics in the franchise industry over the past 20 years.
Many, but not all, franchises grant an "exclusive territory" to their franchisees as part of the rights given under the franchise agreement contract. The purpose of doing this is to assure the franchisee that they will have some area in which they can market and operate under the franchise brand without any competition from another franchisee or even the franchise company itself. This territory is normally described in geographical terms (area code, street or waterway boundaries) though it can also be described as a specified radius originating from the actual location of your unit.
Regardless of the method used to define the boundaries of the territory, the message implied by the territory grant is always the same. In a nutshell, you're being told that this area is large enough and has a sufficient number of potential customers to enable you to build a successful business for yourself. This is where the conflict can come into play.
As the franchise system continues to grow, the franchisor will often desire to increase their number of distribution points by adding as many additional units into the market as possible. Sometimes these units can cannibalize the sales of existing units, temporarily or permanently. That "encroachment" can cause a lot of ill will among the existing franchisees.
Whenever you are evaluating any franchise, be sure to ask the existing operators whether they feel that the territory structure is fair and reasonable, and ask them as well as the franchisor whether there is an appeal process in place to allow for the resolution of any new unit impact conflicts without having to resort to litigation. These types of steps can help ensure that you are selecting a franchise with a strong sensitivity to these sorts of potential issues.
