There is a range of considerations for you as a franchisor when setting up your franchise system. A commonly asked question is whether or not to give your franchisee an exclusive territory for their franchise business. This is an important consideration for the growth of your franchise network, as the level to which you grant exclusivity will affect where future franchised outlets can be located. While the answer to this question greatly depends on the unique needs of your business and your goals as a franchisor, there are some general points to consider which are outlined below.
Firstly it is important to distinguish between the concept of the premises/site and the territory. The premises/site is usually a specific location, such as a shop/warehouse where the franchisee will be operating the franchise business. The territory however, is generally a wider geographical area within which the franchisee can operate.
Exclusive and non-exclusive territories
Territories can be either exclusive or non-exclusive. An exclusive territory is an area within which the franchisee has exclusive rights to provide the goods and services under the franchise to the exclusion of all other franchisees from the franchise network. Alternatively, a non-exclusive territory refers to an area within which the franchisor has the right to let other franchisees operate despite having competing interests in the business’ clientele.
Is having an exclusive territory a good idea?
To decide whether or not you should grant your franchisees exclusive territory is largely a question of how much you would like to restrict competition to the franchisee’s outlet and what your business goals are.
Sometimes franchisors would want to open up a range of franchises in close proximity to one another just to take advantage of a good location that may be used by a competitor. For this they would grant non-exclusive territories to their franchisees. However, there are reasons for which granting exclusive territory instead may be a good idea. For example, franchisees operating in exclusive territories are generally protected from competitors encroaching on their business and clients.
In any case, here are a few questions you should ask yourself to help decide whether or not franchisees should have an exclusive territory in which to run their franchised outlets:
- How will the territory be marked? Will it be by population or geography?
- Will there be any minimum quotas to be imposed on a franchisee operating in an exclusive territory?
- Do you want to be able to renegotiate where the franchisee can operate?
- Are you planning on allowing franchises to develop in nearby territories?
- Do you anticipate any problems arising in relation to deciding a franchise territory due to your particular business concept, i.e. is it a mobile franchise business where territories may inevitably overlap?
The question of granting exclusive or non-exclusive territory to franchisees is becoming an increasingly complicated issue when you take into consideration the popularity of online sales of goods and services. For example, even if your franchise has exclusive territory of a physical space, this does not prevent a competitor from selling similar goods and services online that may affect your business. For this reason, you may want to get some legal advice on your options and what could be the most efficient avenues for you to take for the growth of your business.
To speak with a franchise lawyer about the benefits and drawbacks of incorporating an exclusive territory clause into your franchise agreements, contact LegalVision on 1300 544 755.