How to deal with territory border disputes

27/06/2018 08:00 | Start a business

Franchise territory disputes

Before you sign a franchise agreement, it's essential that you understand your obligations as well as the franchisors’ responsibilities. By being fully informed, you’ll know what to expect and what is expected of you. Understanding these points will minimise the risk of disputes occurring between you and the franchisor.

The importance of due diligence

When you’ve found a franchise that fits with you, your lifestyle and your ambitions you must perform the necessary due diligence. This research includes doing checks on the franchisor and the performance of the business. You’ll need to request a copy of the franchise agreement to review alongside a solicitor that specialises in franchising. An experienced and knowledgeable solicitor will help you to assess whether you’re looking to invest in the most profitable franchise you can.

During your due diligence, you'll consider the issue of territory. This is the area in which you'll be permitted to operate your business. There are many aspects to a territory which you need to take into account. You'll need to assess the size of the area to be sure that there are sufficient potential customers to sustain a profitable business. The territory will also be granted on an exclusive or non-exclusive basis, or you’ll be offered no territory at all. Each of these options will have an impact on your franchise.

The more you understand about your territory before paying the franchise fee the better. Disputes surrounding territorial issues are quite common, so it's best to know where you stand. You’ll want to know your rights if the franchisor attempts to open another franchise in your area.

Here are some tips to make sure that when you part with the franchise fee, you’re getting what you pay for when it comes to your territory.

Insist on specific boundaries

Your territory and its boundaries should be clearly defined in the franchise agreement. Request that specific measures are used such as population size or postcode area. Vague and confusing territories, such as ‘an hour drive from X’ should be avoided.

Ensure that the exclusivity expands to the franchisor

Your franchise contract may state that the franchisor cannot grant another franchisee the rights to operate in your area but what about them? Be sure that you haven't overlooked the fact that the franchisor is within their rights to open a franchise themselves if your territory turns out to be lucrative.

Understand the circumstances in which your exclusivity could be removed

It’s quite common for franchise agreements to contain provisions that allow the franchisor to remove your protected territory in certain circumstances. This could include refusal or inability to pay royalty fees on time or failure to meet performance targets. Be careful though, franchise documentation can be lengthy and complicated to understand, and the provisions may be in a different section to your territory details. Further evidence that the need for a franchise solicitor is so essential.

Be aware of ‘active’ selling restrictions.

Franchise agreements tend to disallow franchisees from actively pursuing new business outside of their territory. However, this restriction does not stop you from accepting unsolicited business from customers located in another franchisee’s territory. And remember, this works both ways, so you may lose out to customers from your territory if they contact a franchisee from another area.

Know the limitations on ex-franchisees

You’re more likely to have the most profitable franchise if the franchisor is strict about what you can and can't do once you've left the network. This may sound strange, but your most prominent threat to your profitability is a previous franchisee setting their own business up in your area.

Without what’s known as a ‘post-termination non-compete covenants’ in the franchise agreement, ex-franchisees will be well within their rights to set themselves up in competition with you. This could have a devastating impact on your business and would be a bitter pill to swallow if you’d paid a significant franchise fee to gain exclusivity of a particular territory.

If you have restrictions on your rights after the term of the agreement, then it's likely that former franchisees will have as well. This should provide you with some comfort that you won't have to compete with an entrepreneur who has all the skills and know-how to run a business identical to yours, minus the brand of course.

Be in the know

As the franchising industry matures in the UK, it's likely that more and more incidents of territorial disputes will occur. This is because established franchises many have granted franchisees with too vast a territory in the early days not knowing how popular their business would become.

This is a lesson for new franchisors looking at ways to divide and allocate territories. It's much simpler to grant franchisees with smaller areas large enough to provide a profitable business, which can be increased at a later date. This is much less problematic in the long run than having to remove a part of a franchisees territory due to under-utilisation.

The key is to be in the know when it comes to your territory. To maximise your chances of operating the most profitable franchise, you should:

  • Research the territory that you’re being granted, considering its strengths and weaknesses.
  • If the franchisor reassures you that they’re not going to open any other franchises in your area, don’t just take their word for it – ask them to confirm it in writing.
  • Have a full understanding of all aspects of the franchise contract, paying particular attention to your territory rights and limitations.
  • Seek professional advice from an experienced solicitor that specialises in franchising.

There are lots of things to consider when it comes to franchise territories. However, you can minimise the chances of any disputes occurring in the future if you do your due diligence and consult a legal professional before you sign on the dotted line.

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