When purchasing a franchise, it’s important to evaluate, understand, and negotiate the assigned territory; this is the area within which your location is protected by the franchise agreement. If you’re not mindful of the territory and terms of the agreement, you could potentially set yourself up for challenges down the road. Here’s what you need to know.
Exclusive Territory vs. Protected Territory
It’s somewhat rare for a franchisor to grant an exclusive territory, but it does happen. If you have an exclusive territory, it means that the territory is all yours and the franchisor will not sell locations to other franchisees or open new locations within that territory. More common, however, is a protected territory. This means the territory is still yours, but the franchisor reserves certain rights that may allow them to add additional franchisees.
Whether you’re assigned an exclusive or protected territory, ask that the franchisor provide you with a map showing the exact boundaries. In some cases, zip codes will suffice, but not if there are two or more territories within a zip code. If you are offering services exclusively to businesses, the franchisor may allocate the territory based on a certain number of business locations you can call on.
Compliance, Exclusions, and Competitors
Some franchisors will tie your territory to compliance with the franchise agreement, stating in the agreement that you may lose the territory if you violate the terms or do not perform to a certain level. An agreement will also typically list exclusions, such as internet marketing or a business with separate trademarks. On the flip side, you might have questions regarding advertising outside of your territory, competitors being acquired, and many other factors. Remember, this is your territory that you’re purchasing. Don’t hesitate to ask questions or bring concerns to the franchisor during negotiation.
Many agreements will allow the franchisor to pursue “specialty sites,” in your territory such as an airport, mall, stadium, or university. Oftentimes, specialty sites do not compete with your location. Nevertheless, you should still be aware of them. If specialty sites are allowed, consider requesting a right of first refusal, so you have the option to purchase a proposed location at a specialty site within your territory.
Opportunity for Negotiation
Territories are not as cut and dry as they may seem; you should always have an attorney review your agreement with you and confirm the details of your territory. Additionally, the territory presents possibly your best leverage for negotiation, as many franchisors are willing to give qualified franchisees larger and more protected territories, especially if you are in an area that has few franchisees. If you’re considering or in the process of purchasing a franchise, contact the franchise attorneys at Soden & Steinberger, APLC for reliable contract review and counsel.