If you are thinking about purchasing a franchise, you’ll want to know as much as you can about protected franchise territories. Determining the protected territory generally ensures that a franchisee will not have to compete with another nearby franchise outlet. That’s the idealistic point of view. Competition between franchises will always occur to some extent, particularly in urban areas. Because the term is open to interpretation, it can become problematic and a major cause of conflict. Both the franchisor and franchisee want to make the most money they can, but the strategy for doing so is not always the same for each party.
Franchisors must be mindful of how they divide their territories so that a franchise has enough opportunity to succeed without encroachment by another franchisee within the system. On the one hand, by cutting territories into small portions, franchisors force franchisees to penetrate the market more deeply so that the overall brand has a higher market saturation. However, a franchise territory must be large enough to ensure a good earning potential for the franchisor. The goal is to achieve a balance between these conflicting points of view, one that considers brand awareness and success (sales and profits), convenience (customer service), and franchise system stability.
Ideally, the situation should provide maximum opportunities for both the franchisees (potential for profit) and the franchisor (aggregate sales). Therefore, like any relationship there is some degree of compromise. Yet even well-intentioned franchisors are not always able to create or sustain such a balance. It’s not usual, for example, for problems to arise when too many franchises have been established within an area that is too small a market to support all the units. Conflicts also occur when the protected territories are too large — the brand takes longer to grow, which results in slow growth for the franchisees.
It’s not a “no win” situation, but the issue does require careful analysis, particularly before deciding to purchase a franchise. Addressing franchise protected territories after taking on a business is difficult and can quickly spoil the business relationship. Like most situations that require a large investment of both time and money, this too requires that you ask as many questions as possible before joining any franchise system. You might ask, for instance, how the franchise territories are determined and if they are clearly defined?
Here are several additional questions to raise:
- What does the Franchise Disclosure Document (FDD) say about protected territory and how does that apply to you?
- What does the FDD say about geographic restrictions in terms of marketing and sales?
- Are there other competitors in the area? If so, how close are they?
- Will there be enough customers to be successful?
- How will your customers be able to distinguish between you and other franchisees within the system?
- Can you choose your territory?
- What are the advantages and disadvantages associated with each area?
- What kind of competition could you expect in the near and far future — one year, five years, 10 years?
- What kind of documentation (market research) exists that points to projected profitability and can you obtain a copy of the documentation?
- What if you want to open additional franchises within the territory or in a separate territory at a later date?
- What do other existing franchisees think of the protected territory issue? Are they willing to be frank and can they offer useful insights?
- How has the franchisor handled territory issues in the past?
- Do you have any input as to where the site within the territory is located or has the location been predetermined?
- In whose name will the lease be identified?