Welcome to my first franchise blog – I’ll jump right in. I am working with a former classmate from business school to open what we hope will be a number of pizza restaurants within a few years. The stores will emphasize delivery and carryout, but may allow for a small dine-in footprint at the front of the store. We are working with a well-respected franchisor and my plan is to write about highlights of the development process. This first article pertains to territory rights.
Being the proverbial new kid on the block, the initial priority has been to secure a location. Given the franchise has been in existence for many years, this is no simple affair and it puts us right in the middle of the careful balance that must be struck between the franchisor and existing and new franchisees. For instance, overdevelopment can strain the sales and profits of existing locations, but there is also an opportunity cost by lack of development through lost sales, which can flow back to the company as lost franchise royalties, lower systemwide sales, or to newer franchisees in the form of an inability to develop promising new areas.
Part of this process consists of the extent to which existing franchisees have the ability to operate near or within their existing territories. Agreements can be exclusive to the franchisee, meaning no one else can come in and develop a certain territory. They can also be nonexclusive where multiple franchisees can compete for development sites. Territories can consist of a clear-cut radius from which the franchisor cannot open company-owned stores and other franchisees cannot open competing stores.
For agreements that were signed some time ago, territories can experience changes – in terms of population growth, traffic patterns, and the extent of overall development. As such, contracts can contain terms that allow for a renegotiation of the territory, which can come into play for the reasons cited above, such as if a franchisee isn’t developing prime locations fast enough.
Existing franchisees can also be given a “right of first refusal”, which is precisely what we are coming up against in a couple of locations we are particularly interested in. We are waiting to hear back on some inquiries, which may allow the existing franchisees the ability to reserve a location if they agree to develop it within a certain time frame.
We still consider ourselves in the early innings of the store development game. After a location is secured, the next steps will be signing a lease and building out the initial store. In regard to the territory rights, at the end of the day, what’s most important is to have as much of the territory rights conclusions in writing. You know what they say about verbal agreements – they are as good as the paper they are written on. This will at least let us know what territory rights we have and the boundaries we are able to work within.