What Are Protected Franchise Territories?
If you are planning to invest in a franchise business, it's important to know whether the franchisor offers protected franchise territories and how they are defined.
Understanding protected franchise territories
Franchisors will assign protected territories to franchisees for conducting business to ensure that their franchisees will not have to compete with other franchise outlets. Competition, however, may still occur between franchisees, particularly in urban areas.
Because the term sometimes is open to interpretation, it can be 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 necessarily the same for each party.
Ideally, the size of a territory should provide maximum opportunities for both 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 franchise units have been established within an area that is too small a market to support all of them. Conflicts may also occur if the protected territories are too large—the brand takes longer to grow, which results in slow growth for the franchisees.
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Questions to ask the franchisor about protected territories
Before joining a franchise system, it's important to fully research and understand how a franchise system defines territory size. Here are questions to ask the franchisor:
- 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?
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