How secure is your franchise territory?
In many franchise systems franchisees are restricted to a particular location. However, in some franchise systems franchisees are offered either an exclusive territory or an exclusive marketing area. Both of these provide a level of protection from competition within the franchise network.
Exclusive territory means that no other franchisee or the franchisor, apart from exceptions below, can operate within such territory. Exclusive marketing area does not prohibit other franchisees from servicing customers in a particular territory but it does stop them from marketing to customers in that territory. Franchisees must understand the difference between the two and how it affects them.
Even if an exclusive territory is offered, there are various scenarios when either the franchisor or other franchisees can service customers within such territory.
1. Breach of the minimum performance requirements within the franchise agreement
Most franchise agreements will contain a provision that if:
- the franchisee does not reach the minimum performance criteria listed in the franchise agreement; and
- the meeting(s) with the franchisee and any subsequent training offered does not result in the franchisee reaching the minimum performance criteria
the franchisor may do one of the following:
- Reduce the franchisee’s territory;
- Remove the exclusivity attached to the territory; or
- In the worst case scenario, terminate the franchise agreement.
All potential franchisees are highly recommended to review any minimum performance criteria contained in the proposed franchise agreement, to assess how realistic it is to achieve it and to discuss any amendments required with the franchisor before signing on the dotted line.
2. Online sales by the franchisor
These days no brand exists without a website and online presence. It does not, in itself, mean that the franchisor sells goods or services online. However, during the due diligence review of the franchisor’s system potential franchisees must discover whether the franchisor sells online, as such sales may compete within their territory or marketing area.
Amendments to the Franchising Code of Conduct, which came into effect from 1 January 2015, introduced a new section into the disclosure document, in which franchisors must disclose certain information regarding their online activities. Potential franchisees must assess this section carefully to understand whether the franchisor operates in competition with them or whether the website and other online activities are only used to promote brand awareness.
The franchise agreement should also outline how the franchisor’s online presence affects the franchisee’s territory.
3. Inability to service customers
In the event that the franchisee is unable to service a customer within their territory for any reason, there is often an option in the franchise agreement for the franchisor to either send the customer to another franchisee or to service them directly by the head office.
Before entering into a franchise agreement, potential franchisees need to consider the following:
- Are they offered a territory? If so, is it exclusive?
- Is exclusivity only in relation to marketing?
- If the territory is exclusive, is there a prohibition from seeking and accepting business from customers outside the designated territory?
- Are there any minimum performance requirements contained in the franchise agreement? If so, how realistic are they to achieve?
- What plans does the franchisor have for the adjacent territories?
Once the answers to the above are obtained and the potential franchisee will be able to understand exactly what is on offer in relation to the territory and in which circumstances exclusivity may be lost.