As a franchisee, you want to feel secure that your territory and market are protected, and yield the expected returns. The only way to put protections in place regarding your territorial rights is before you sign the Franchise Agreement. Some franchisors do not offer exclusivity rights, and you should know and understand that before making any commitment.
Those franchise agreements that do stipulate exclusive territory rights (which is more typical), often neglect to detail contingencies for ‘what if” situations. And there are several scenarios that can happen that technically don’t violate the contract’s territory clause, but which can severely impinge on your sales and profits.
What do you need to look for regarding franchise territory rights in the Franchise Agreement?
1. First of all, verify whether it is an “exclusive” territory and exactly what that means. For instance, does the exclusivity apply to a geographic area, with specific designated borders, such as a county or square mile limit?
Sometimes territories are allocated by demographics based on population numbers, so your territory may be mapped according to a minimum number of households. But neighborhoods change, and so can the population. In the case of a population increase, that could entitle the franchisor to open a competing franchise very close to your “exclusive” territory. Find out what the franchisor will do to protect your customer base.
Some franchisors offer “right of first refusal” which gives the existing franchisee the option to take over the new territory before it is offered to anyone else.
2. Another infringement situation might arise through mergers or acquisitions – if your franchisor company is bought by another or acquires a competitor’s brand with franchises in your territory. Newly acquired franchises could be allowed to operate under your franchise brand, and that will siphon off your customers.
Again, your need to have contingency clauses in the Agreement to protect your territory rights in the case of an acquisition or merger. Know how you will be compensated. Sometimes the existing franchisee receives fees from the new competitor. The franchisor may agree to closing newly acquired competitors, or might make a provision to sell the competing location to the existing franchisee at a fair market price.
Here are some basic questions to ask, and details to examine regarding territory rights:
- How is the territory defined and is it exclusive? For instance, is the territory marked by specific geographical borders or perhaps within the confines of one mall?
- Are you allowed to choose the territory and select the location within that territory? Does the franchisor retain any right to force relocation of your franchise at a later date? If so, under what conditions can this happen?
- If the territory is exclusive, are you prohibited from soliciting and accepting business from customers outside your designated territory? These situations might arrive for home or delivery types of services.
- Exclusive territory rights sometimes have minimum sales and fee quotes imposed on the franchisee. Be sure you understand any such requirements because failure to meet those minimum numbers can jeopardize exclusivity rights.
- Are “first refusal rights” given to the franchisee in case of encroachment through territory change, acquisitions or other circumstances?
- Find out about the possibility of future re-negotiation regarding the territory. If you contract is for five or ten years, will the territory by susceptible to change at the franchisor’s discretion?
- Find out what plans the franchisor might have for the areas adjacent to your territory.
- Get the facts about any past territory disputes between the franchisor and franchisees. Your lawyer should be able to ferret out this information.
There is of course homework you should do before getting down to these details. Your due diligence should uncover market potential and expected sales within a territory to confirm that the territory is large enough to meet your financial expectations.
And since prospective franchisees should always talk to those already operating the business, be sure to get their opinions about territory allotments, and the franchisor’s commitment regarding exclusivity rights.
And last, but not least, be sure it’s in writing! Your territory rights and protections must be spelled out in the Franchise Agreement, which your lawyer should thoroughly examine and explain. Prevention is key — reversing a wrong is always more difficult than keeping it from happening in the first place.
Know how your territory is defined, what protections are in place, and how you will be compensated if your rights are breached.