Originally uploaded on 02/12/2017. Updated on 04/04/19.
The benefits of the franchising model are clear to see, but some of the issues that can affect independent businesses can also have an impact on individual franchise units.
If a single high street were home to a number of stores selling the same products and the stores were forced to compete with each other for custom, the profitability of each of the stores would inevitably decrease, potentially resulting in the failure of the businesses in the long run. The same is true for franchises. This is why the concept of franchise territories was introduced and why, today, franchisors should allocate specific territories to their franchisees.
What is the definition of franchise territories?
There are generally two types of franchise territory that will be detailed in your franchise agreement. These are exclusive and non-exclusive territories.
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When you buy a franchise business for sale with an exclusive territory, the franchise agreement will specify that the franchisor will not introduce another franchise to your area. The exclusivity of the territory is intended to give you the reassurance that you can build your business without the worry of another franchisee stealing revenue in your area during the term of the franchise agreement.
This means that you won’t end up in competition with stores under the same brand but, of course, your franchise agreement doesn’t stop competitors from other businesses setting up nearby. Therefore, you should always consider your USP – what differentiates the franchise that you invest in from the others in the market? By investing in a franchise with a USP, you can continue to stand out from the crowd, no matter how saturated the market becomes.
Franchise agreements with non-exclusive territories also outline the area within which franchisees are permitted to sell their products and services. However, non-exclusive territories enable franchisors to give the go-ahead to other franchises who wish to set up a unit in that territory.
The success of the brand as a whole will be negatively impacted by the introduction of a second franchise unit in a territory without the demand for it, so it is in the best interests of both the franchisor and the franchisees to ensure that this doesn’t happen. Therefore, non-exclusive territory franchises rely on an element of trust between the franchisor and the franchisee. The franchisee should be confident that the franchisor will not jeopardise their profitability.
As a franchisee, you should take all reasonable efforts to understand exactly what you are signing up for. This means speaking to existing franchisees to find out more about the opportunity. This should give you a true insight into the workings of the business and identify any false claims the franchisor may have made in order to exaggerate the success of the business. Franchisees can tell you whether they feel the territory structure is fair and reasonable. You could also find out whether there is a process for franchisees that wish to voice any concerns regarding territories during their franchising journey.
It is important to carry out thorough research, but rest assured that most franchisors are decent and are more interested in generating profit through royalties than by selling new franchises and risking existing sales.
What types of territories are there?
In general, franchise territories are based on a specified geographical area, a map of which is usually included in the franchise agreement. However, this isn’t the only method of dividing territories. A territory can also be measured as a radius originating from the location of your franchise or limited to one place, like a shopping centre.
The definition of franchise territories can be quite complicated, so you should consult a franchise professional to help you prepare for the conversations that you’ll have with the franchisor. When you’re negotiating the size of your territory, you should try to be reasonable. You can’t expect the franchisor to agree to an unrealistic territory size, but you should also ensure that your franchise gets off to the best possible start without the threat of competition from another franchisee.
Can my territory change?
Even if you’ve been granted exclusive territory rights as part of your franchise agreement, there may be a clause that allows the franchisor to make changes to your territory size or exclusivity over time. The franchisor could be tempted to do this in the eventuality of two occurrences:
A change to demographics within the franchise territory. If there has been significant change within your territory that increases the number of potential customers and demand for your products and services, your franchisor might deem it appropriate to alter territories. This could mean dividing up your existing territory or inviting another franchisee to open a business within your area. In this situation, it’s likely that you’d be given first refusal to buy the new franchise business for sale in your area. This not only gives you the chance to grow your business through the purchase of another unit, but also ensures that you retain exclusive rights over your territory.
An under-performing franchise. If a franchise is failing to meet the minimum key performance indicators, the franchisor may have the right to sell another franchise in a previously exclusive territory. The franchisor will want to make the most out of what could be a profitable territory and could take action if the existing franchisee can’t achieve expected levels of performance. In cases like this, the underperforming franchisee will receive feedback, training and support to improve profitability levels, but if these fail to improve performance, the exclusive territory could be revoked.
Franchise agreements are lengthy and complicated legally-binding documents – and no two are the same. For this reason, it is important that you consult a specialist franchise solicitor to review the contract with you. It is in your best interests to know exactly what you’re signing up to, including what rights and obligations you have. The franchise territory section is just one of many elements that require expert knowledge and advice before you agree to invest in any franchise.
Alice Tuffery, Point Franchise ©