If you are buying a franchise one critical legal and business issue that you need to evaluate is whether or not you will be granted a protected territory. Franchisors use different terms when referring to the territory within which you will operate your franchise business. Terms such as “operating territory”, “operating area”, “exclusive territory”, “exclusive area” and many other terms are used when referring to where you may or may not conduct the operations of your franchised business. Understanding your territory protections are critical and the information below will assist you in your evaluation.
When evaluating your territory rights, the first step is to understand the franchised business and whether or not you will be selling goods or services from a fixed location or if you will be selling goods or services on a mobile basis. Examples of fixed location franchises include traditional retail businesses such as restaurants, gyms, and many other retail stores and service based businesses such as spas and tutoring services that operate from a center. Examples of mobile franchise businesses include the many service based businesses where franchisees go out and provide their services on-site at their customers location or deliver product to the customers location. Examples of mobile franchised businesses include home service businesses and even businesses which maintain a physical retail presence but rely on customer deliveries for items such as gift baskets.
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, i.e., 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, i.e., does the franchise agreement state that the franchisor will not allow other franchisees to service customers within your designated operating area?
Once you understand the nature of your franchised business, fixed location verses mobile, you are then ready to better understand the rights granted to you and the legal rights that you should be looking for before you sign the franchise agreement.
Franchisors vary dramatically as to whether or not they offer territory protections and for those systems that do offer protection there is great variation among them as to the type of protection that is offered. If a franchisor does not offer territory protection, for a fixed location business that means that the franchisor can grant and authorize another franchisee to set up shop right next door or, more realistically a few blocks away. For mobile businesses this means that the franchisor could authorize other nearby franchisees to directly compete with your customers.
The most common instances where franchisors may not offer territory protection at all typically arise with larger and more mature fixed location retail based franchise systems. The reasoning for the franchisor is so that they may add additional units. However, for the franchisee, this may lead to issues of encroachment and future lost sales and new outlets are added nearby.
If a franchisor does offer a form of territory protection you must evaluate the scope of that protection. For fixed location franchises territory protection will typically involve a set radius surrounding your fixed location. For mobile franchises territory protection will typically involve a set territory (i.e., geographic locations, zip codes, etc…) within which you will be granted the right to exclusively service customers. There are many variations as to the type of territory protection and you must carefully evaluate exceptions.
Within a franchisor’s FDD, FDD Item 12 is exclusively devoted to describing and identifying the type of territory protection that you may or may not be afforded. Item 12 should play a critical role in your review of the FDD and your overall evaluation of the franchise opportunity.
To learn more about buying a franchise and the franchise review process, click here.
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