A franchise territory is the area within which a franchisee is authorized to establish and operate a franchised business. The scope and size of a franchise territory is determined by the franchise agreement, and the levels of protection afforded to a franchisee within the designated territory will vary from franchisor to franchisor. Franchisors use many different terms when referring to franchise territories, such as “operating territory,” “operating area,” “exclusive territory,” “exclusive area,” “designated area,” and “area of responsibility.”
If you are buying a franchise, evaluating your franchise territory and the protections granted to you is a critical task. Although your franchise agreement will designate your franchise territory and the level of protection you are granted within FDD Item 12, your franchisor is required to disclose the scope, size, and level of protection it will afford you within your franchise territory.
The level of protection that you may or may not be granted within your franchise agreement varies from franchisor to franchisor, and many times depends on the industry and type of business. Some franchise systems offer exclusive territories where other franchisees are not authorized to operate or sell, while other systems offer you the ability to operate and sell within a territory but without protection from other franchisees. In other instances, the territory protections fall in between: some forms of territory exclusivity come with specific exceptions for certain venues or forms of commerce, such as the Internet.
Below, we summarize important factors to consider when evaluating and, potentially, negotiating the scope, size, and protections associated with your franchise territory:
For fixed location franchises, the “territory question” comes down to whether or not the franchisor will you grant you territory protection surrounding your retail location. For example, does the franchise agreement state that the franchisor will not grant franchises within a set radius surrounding your retail store?
For mobile franchises, the “territory question” comes down to whether or not the franchisor will give you a defined territory wherein you and ONLY you will be permitted to service customers. For example, does the franchise agreement state that the franchisor will not allow other franchisees to service customers within your designated operating area?
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