Why do I need a territory?

By Sarah Stowe | 29 Oct 2015 View comments

When you are looking at buying a franchise, the options open to you are very varied: from a service business to a bricks and mortar shop, from cleaning pools to selling furniture and beds, from mobile coffee to aged care.

Many franchises come with a territory, or a preferred marketing area (PMA) or an exclusion zone (EZ) – these all serve a different purpose but are basically a map with a right to use that area in some way within your business.

However many large, established businesses and retail chains will not provide a Territory, PMA or EZ as they are powerful enough as a brand to say you can market where you wish, and this is where you are starting from – the store. McDonalds, Caltex, Flight Centre and many others can and do operate this way.

If on the other hand you are buying a service business, it is almost essential there is a properly defined territory identified in the franchise agreement. This defines the area leads are generated within, and that the leads generated from online, telephone calls and other approaches to the call centre are sent to you for action. This is what you are paying for, and this needs to happen in a seamless process. Franchise systems like Mortgage Choice, ANZ Mobile Lending, Appliance Tagging Services, Bridgestone, KwikKopy and Aussie Homeloans all operate with clearly established territories.

Smaller businesses and newer businesses need to give a territory to attract you, and give you a sense of security in your new investment. What you need to know is how that territory was established, was there a systemised process, and can it be easily defined so that the leads from within the territory go directly to you for action?

Equality

Any franchisor operating territory-based franchises should be able to stand up and say (hand on heart), “Our territories were created to offer similar opportunity to our franchisees based on the following assumptions.”

Now those assumptions may be explained as, for example: “Each territory was based on 10,000 households, and because what we market /service is more suitable to higher socio economic areas, the high socio economic areas require only 8,000 to 9,000 households, where lower socio economic areas require 11,000 to 12,000 households.”

There needs to be basic logic and some assumptions about the future business, and then these need to be used honestly to create territories of similar opportunity.

We normally recommend that as there are around 2,600 postcodes in Australia, as long as the franchisor has a vision of fewer than 300 territories Australia wide, then using Australia Post postcodes is the way to go. Almost everybody knows the postcode they live in, and it makes it very simple to allocate the jobs to the relevant franchisee.

The options

Most new franchisees want a territory rather than an EZ or PMA, as it gives security. A territory is a bit like having a Torrens title on a block of land; something that once issued cannot be easily revoked, has value and can be sold in the future. This is no different to owning a block of land rather than leasing the land, as far as long term security is concerned.

So a territory is often seen as the best option for a franchisee, as it clearly also cover any issues about acting as an exclusion zone, and sets that area as the preferred marketing area in terms of leaflet drops, cold canvassing and any other form of local area marketing you want to perform.

Many franchisors are reluctant to give a territory as they can see it as limiting in the future, especially if they feel their brand is going to go gangbuster. In reality this rarely happens quite to the extent that they dream of, and in most cases giving territories for a 10 or 20 year agreement assists in securing the franchisees to the brand.

In many cases even if there is a territory, there is nothing stopping the franchisee opening second and third stores in the area in the future, or running a second or third van if the demand is there.

If you are a potential franchisee, ask how the territories have been formed and why, and if you see a ‘beer and pizza’ map on the wall suggest a data driven territory planning process is necessary before committing your hard earned money.