What you get with an exclusive franchise territory
When signing up to a franchise it is often beneficial to receive an exclusive territory for the business.
An exclusive territory prevents over saturation of a particular brand in the marketplace and prevents franchisees in the same franchise network competing against each other in the same vicinity.
What does an exclusive franchise territory offer?
This guarantees to the franchisee that the franchisor will not establish another business, either itself or grant rights to a third party, in the exclusive zone as defined by the franchisor. Franchisees are also normally permitted to market and offer their products in adjacent areas to the territory that are not currently occupied by a franchisee.
However, a franchisor may decide to offer a franchise directly adjacent to the boundary of the exclusive territory.
In most cases territories are provided based on a certain geographical area, often a particular suburb. Franchisors may also provide exclusivity based on the population in a given area, with the intention that each franchisee will have the ability to market and offer their product to a similar number of people.
What to look out for in an exclusive territory agreement?
When entering into a franchise agreement for an exclusive territory it is essential that the territory is clearly defined. This ensures that there can be no disagreements over the area given to a franchisee. Often postcodes and suburb lines are altered or changed. It is always recommended that a map be attached to a franchise agreement to clearly mark out the exclusive area.
Franchisees should be mindful that an exclusive territory may come with certain additional conditions. A franchisor may often be able to vary the size of the area or change the area to be non-exclusive if a franchisee fails to comply with the franchise agreement or certain special conditions.
If a franchisee does not operate the business to the franchisor’s standards or achieve the minimum performance requirements then a franchisor may elect to vary the area.
Franchisees should note that typically while they may have exclusivity in a particular area they will not have exclusivity over customers, who may choose to frequent another franchisee in the network outside the exclusive area.
Franchisees should be mindful that they will often have more obligations to undertake their own marketing in their exclusive territory. This may require further spending and incur higher costs for the franchise. Franchisees must also be mindful that their marketing activities must not encroach on the area of another franchisee in the network.
An alternative to territorial exclusivity
An alternative to an exclusive territory that is commonly offered by a franchisor is a first right of refusal for any further franchise within a particular territory or area. This allows a franchisee to have the comfort of knowing that any further franchises in the territory will first be available to purchaser.
However, should the franchisee not accept the offer of another franchise then it may be offered to another franchisee.
When deciding on a territory franchisees should keep in mind that bigger is not always better. The territory should not be so large as to negatively impact the business or the overall network. If territories are too large it can prevent the franchisor from having enough franchisees to adequately service the population in those areas and can prevent further growth in the network.
Franchise territory exclusivity in an online world
While franchisees may have exclusivity in a territory this may not wholly prevent competition in the area. Franchisors often reserve the right to offer the same products or services online which may encroach on a franchisee’s business. Franchisees are also often prevented from operating their own social media or online presence which right is usually exclusively retained by the franchisor.
It is important that franchisees check the disclosure document and read it in conjunction with their franchise agreement to ensure they understand the rights being afforded in respect of a territory.
A disclosure document must explicitly state whether a territory is exclusive and whether the franchisor or any other party may offer the same products or services whether online or not in the territory.
Franchisees should always ensure that there is no inconsistency between these documents and if there is any doubt discuss the changes with their solicitor or request further information from the franchisor.