Franchise Territory - Protecting Yours

Date AddedMarch 29, 2010 04:48:55 PM

AuthorJohn Sier

Category

Many franchisors are moving away from territory-based systems in favour of franchises that are site- specific or for a non-exclusive territory or marketing area. This trend occurs both in systems which involve retail premises and those which involve mobile or home-based franchises. This is most often due to the franchisor not wanting to lock themselves out of a potential market by granting an exclusive territory to one franchisee, only to discover later that there is sufficient demand within that territory to support two or more of the same franchised businesses.

For a franchisee, being granted a territory can be a double-edged sword. A territory usually grants exclusive or protected rights to promote and/or supply the goods or services of the franchised business within the territory, but also limits the franchisee's ability to market the business or supply customers outside the territory. It also means the franchisee may be under the added pressure of being solely responsible for developing the territory and promoting the franchise system within it. Following is a guide to some of the key questions you should ask your franchisor about your territory.

Will I have a territory granted to me?

When entering into a franchise, you must ascertain from the franchisor at the outset whether or not you will be granted a territory at all, or whether the franchise granted is specific to a particular site or simply a mobile franchise which is not related to a defined territory.

What type of territory will I have and what exclusive rights will I be granted within it?

If you are to be granted a territory, the next question to ask the franchisor is whether the territory will be exclusive or not. This is not always a simple question. There may be limits to your exclusivity. For example, a franchisor may undertake not to establish any other franchisees within your territory, but may retain the rights to itself to service large corporate clients or operate temporary or mobile businesses within your territory. Alternately, the franchisor may promise to grant you complete exclusivity, but the exclusive rights may be compromised or lost if you fail to achieve certain performance criteria or breach your franchise agreement. The franchisor's disclosure document must identify whether the franchise granted is limited to a particular site or whether it is for an exclusive or non-exclusive territory, and should also provide answers to the following key questions relating to exclusivity of territory:

Whether other franchisees can operate similar franchises in the territory;
Whether the franchisor or its associates can operate similar businesses in the territory.
Whether the franchisor or its associates can establish similar franchises in the territory
Whether you may operate the business outside the territory; and
Whether the franchisor can change your territory.

If there is insufficient information in the franchisor's documentation regarding the above points, you should ask specific questions of the franchisor to determine exactly what rights and limitations you will have in your territory.

What is my territory?

You must ensure you are familiar with the precise borders of any territory granted to you. Carefully examine any territory map, postcode or boundary description provided by the franchisor and ask for clarification if inadequate detail is provided. You need to know exactly where your territory extends to. If a border is described as a particular street, does that include both sides of the street, or only one? If the territory is defined by postcodes, do you know which precise areas are included in those postcodes, and what happens if the postcode areas are changed during the course of your franchise? These details can make significant differences to the value of your territory and can ultimately affect the profitability, growth potential and sale price of your business.

How was my territory chosen?

Once you are familiar with the confines of your territory, ask the franchisor how it decided to 'carve out territories for the franchise system. Are all territories equal in size, population density or other demographic criteria? Again, the disclosure document should contain some detail in respect of the franchisor's territory selection policy, but your inquiries should delve deeper. You should ask to review the results of any demographic data, market research or feasibility studies conducted by the franchisor. You may wish to engage an expert to conduct your own similar investigations into the makeup of the territory and its likely impact upon your business potential.

How will the franchisor help protect my territory?

You should also query how the franchisor implements any of its policies relating to territories and how it monitors and ensures compliance if, for instance, another franchisee starts operating in your territory in breach of the exclusive rights granted to you.

How willl I protect and develop my territory?

You are satisfied with the franchisor's responses to all the above questions, the next issue to consider is how you will make the most of your territory over the medium to long term and ensure continued growth within a finite area. Ask the franchisor what its general plans for expansion and promotion of the franchise network are. How will these affect your individual business and will the franchisor's intended actions be sufficient to protect your territory? What actions will you be allowed or expected to take, over and above the franchisor's initiatives, to develop the territory and to market the franchise system within it? What limitations will the franchisor impose on your right to undertake promotional activities within the territory? For instance, will you be free to sponsor local charities or be involved in community events? Will the franchisor have veto power to prevent you from participating in certain campaigns or functions if they do not fit the franchisor's image or social and political ideals? You should have a well-considered and detailed business and marketing plan for intended activities within your territory and discuss this with the franchisor before entering into the franchise. Be sure you are comfortable with the franchisor's attitude towards your territory development strategy.

Can my territory, or my rights and obligations within it, change?

Although having an exclusive territory affords certain protection, flexibility is also important, You should query whether, and how, the franchisor will assist you if you find your territory is too large to properly service or too small (geographically or demographically) to sustain a viable business. Will the franchisor be prepared to substitute or alter your territory in consultation with yo_. if, for example, a disproportionate number or magnitude of competitors establish themselves within your territory, or if there is a sufficient change in the demographic, financial, environmental or other conditions in your territory to affect your business?

What about surrounding territories?

You should consider negotiating a first right of refusal for franchises which the franchisor intends to grant in the areas immediately surrounding your territory. Having a first option to purchase neighbouring territories may be a good way to protect your territory and foster future expansion. Other questions to consider asking your franchisor may include what rights you may have to operate outside of your territory within areas which have not yet been subject to a franchise, or if the franchisee in that area is unwilling or unable to perform the work. Ultimately, irrespective of whether you are granted an exclusive or non-exclusive territory or no territory at all, you will need to work hard to promote your franchise locally and develop your business. But, in order to plan for success, it is imperative that, prior to signing any agreements or entering into the franchise, you are fully aware of precisely what territory you will be granted, exactly what your rights and obligations are in respect of that territory, and what your targeted strategies are for protecting your territory and promoting your business within it.

LAWYERS
John Sier, Principal,
Mason Sier Turnbull Lawyers, Corporate & Franchising Team.
MASON SIER TURNBULL LAWYERS
315 Ferntree Gully Road
Mount Waverley Vic 3149
Australia
T: -61 3 8540 0240
T: -61 417 438 259

F: -61 3 8540 0202
www.mst.com.au