Take the guesswork out of franchisor territory planning by following these best practices.
KEY TAKEAWAYS
- Poorly planned franchise territories can lead to serious problems for franchisors including stalled growth and underperforming franchisees.
- Data-centric franchise territory structures can support the long-term growth and success of franchise systems.
- Emerging franchisors who take a proactive approach to territory management can prevent obstacles when scaling in the future.
When it comes to building a thriving franchise system, a common source of confusion among successful emerging franchisors is the question of territory planning.
An important tool for keeping your franchise system organized, equitable and on the right track toward expansion, having a well-defined franchise territory structure is critical for your brand’s growth and success. Despite its significance, though, new franchisors often overlook the importance of strategic franchise territory planning until it’s too late – a blunder that can lead to stalled growth, poor validation and legal issues with franchisees further down the road.
In this article, we’ll discuss common mistakes to avoid when setting up your offering’s franchise territory structure, and explore strategies for defining franchise territories without undermining the future growth of your business.
Why do franchise territories matter?
A franchise territory is a geographically defined area granted to a franchisee by the franchisor where the franchisee is exclusively authorized to operate their franchised business and to sell and market the franchise brand’s products and services.
Although the size and structure of franchise territories differ between franchisors, poorly planned territories can lead to serious problems including underperforming franchisees in multiple territories, stagnant growth, lawsuits and more. Because of those risks, knowing how to create well-defined franchise territories is critical.
Common Franchise Territory Mistakes
It’s not uncommon for successful emerging franchisors to make mistakes when planning a franchise territory structure for their franchise system – even if their brand has achieved royalty sufficiency.
Common missteps that new and emerging franchisors make when setting up their franchise territories include, but aren’t limited to, the following:
- Too much, too soon.
Although it might be exciting to offer your first few franchisees more territory right away, doing so can overwhelm underprepared franchise owners. - Uncontrolled growth.
Poorly planned or out-of-control territories can reduce validation and lead to franchisee underperformance, legal troubles and more. - Overlooked liabilities.
Depending on your location, some franchise territory structures might run afoul of state franchise laws, so it’s important to consult a franchise attorney during the territory planning process to ensure compliance.
Remember that doubling a franchisee’s territory won’t necessarily double their income – in some cases, it could have the opposite effect. By avoiding common mistakes when mapping out your franchise territories, you can prevent sabotaging your brand’s growth and, ideally, support your franchisees’ success in the process.
Strategies for Franchise Territory Planning
For emerging franchisors that have achieved some success during their first few years in business, following best practices when setting up territories is critical. By establishing consistent standards and adopting a standards-based approach to franchise territory planning, you can avoid common pitfalls and stay focused on growth.
1. Manage franchisee expectations
New and emerging franchisors sometimes overlook the importance of setting the right expectations with franchisees regarding territories. But that misstep can affect franchisee validation and lead to potential legal hassles, so it’s important to communicate expectations early on.
Before offering franchisees new territories, consider the following approaches to setting expectations about territory structure and availability:
- Be conditional. Establish key performance requirements to prove franchisees are capable of taking on additional territories.
- Create more options. Offering franchisees the right of first refusal for new territories can give them options without limiting your ability to sell those territories to other buyers later.
- Set minimum royalties. Taking territories back from underperforming franchisees can be challenging in some states due to franchise relationship laws. Instead, franchisors should consider alternatives like setting minimum royalties for multi-territory franchisees.
By setting the right expectations about franchise territories, you can prevent future conflicts with franchisees and avoid sabotaging your brand’s growth potential as a franchisor.
2. Define and manage your territories strategically
Managing your brand’s growth before it has a chance to get out of hand is important for emerging franchisors. By taking a strategic approach to franchise territory planning, you can define better territory structures, differentiate your franchise offering and prevent disputes before they arise.
To effectively define your franchise territories, consider the following strategies:
- Use caution when defining “open areas.” Although open territories can be useful in certain circumstances, they can also create headaches if franchisees dispute leads or sales in those areas after they’re sold later. To prevent possible friction, work with a franchise attorney to define the conditions for accessing open areas.
- Invest in mapping services. By creating predetermined territories based on data and target demographics, franchisors can keep territories fair and prevent missed growth opportunities.
- Set standards and stick to them. Whether your franchise territory sizes are defined by population, income or other demographics, keep your standards fair and consistent – and be prepared to show franchisees how their territories are determined.
- Take control. Validating prospective buyers’ capital and qualifications is critical for stability and growth. Offering predefined territories within a general area, rather than allowing franchisees to select specific zip codes, can also prevent cherry-picking that may limit future growth.
In addition to ensuring that franchisees are offered equitable opportunities to scale into new markets, relying on data to strategically develop territories can help you make better choices for managing your brand’s growth.
3. Treat territories as separate businesses
Because demographics often differ across multiple territories, it can be wise to approach each territory as a separate entity – even if the units in those territories are all owned by the same franchisee.
To develop the right mindset for approaching territories as separate businesses, consider the following strategies:
- Assign homework. When evaluating prospective buyers, ask for a three-year business plan to ensure you’re on the same page about growth, capital and development goals.
- Address different markets. Establish requirements for franchisees that expand into territories with identifiably different demographics, such as additional websites, expanded social media, extra marketing and more.
- Know your numbers. Evaluate territory performance and make adjustments to your Item 19 financial performance disclosures when appropriate.
By treating multiple territories as separate businesses, you can encourage franchise owners to maintain a growth mindset that acknowledges the needs of differing demographics within the areas where they do business.
4. Encourage collaboration across multiple territories
While franchised businesses operating in different territories are separate entities, franchisees operating near each other shouldn’t be in competition with each other. Instead, it’s important to look for ways to help them share resources and work together to benefit the franchise system as a whole.
Strategies for preventing competition between neighboring territories include, but aren’t limited to, the following:
- Protect territories. In large metropolitan areas, franchisees sometimes operate near other franchisees’ territories. To prevent unnecessary competition, establishing protected territories can sometimes be helpful.
- Encourage cooperation. For franchisees operating near fellow franchisees’ territories, co-hosting events can save money and generate leads across those territories. Shared websites that list multiple neighboring territories can also be useful for preventing SEO competition.
- Share resources. Neighboring franchisees can sometimes benefit from pooling resources or advertising costs for the shared benefit of their businesses.
While cooperation is important for neighboring franchisees, it’s also critical to know when a territory should be limited to a single unit. Although criteria vary depending on industry, business model, customer demographics, opportunity profile and more, knowing the appropriate time to assign one territory to one franchisee can improve franchisee validation.
5. Stand by your territory structure
- Keep a level head. Although outside professionals can offer great advice, they aren’t always right. Maintain control over your territory structure and know when to say “no” to advice that isn’t in your franchise system’s best interests.
- Tell the right story. An experienced franchise attorney can help you competitively position your Franchise Disclosure Document (FDD) to reflect your territory structure and tell a compelling economic story about your offering.
- Compliance matters. The franchise industry is heavily regulated at the federal and state levels, so it’s important to work with an experienced franchise attorney when defining your territory structure to navigate franchise laws.
By following best practices, maintaining control of your franchise territory structure and staying consistent with your standards, you can avoid sabotaging your brand’s growth while supporting franchisees in their success over the long run.
Are you a franchisor who needs help setting up territories to support your brand’s growth? Contact us now!