To ensure that a franchisee will not have to compete too closely with a same-brand business following an identical operating model, many franchisors set aside specific sales areas for their franchises.
But as simple as the concept may sound in theory, protected franchise territories areas are not always an easy proposition in practice.
Take protected territories to one extreme, for example, and you might have but a single franchise-brand quick-serve restaurant for an entire metropolitan area. Of course, this would hardly serve the franchisor who seeks to build strong brand recognition — and network-wide sales — by opening as many locations as reasonably possible.
Flip the script, however, and you could have a franchise-brand quick-serve restaurant on practically every other corner! When going into business you expect to compete with independent businesses and other franchise brands, but hardly your own!
The goal, of course, is to achieve the right balance between these conflicting points of view. The ideal solution would take into account brand awareness, franchisee sales success, customer satisfaction and franchise network stability. Can it be done? Surely, if the number of franchises in operation is any indication. Per Statista, it’s estimated that there were 745,290 franchise establishments in the U.S. in 2017.
So, how should a prospective franchise purchaser approach the issue of protected territories? With due diligence before you buy! Some tips:
- Ask the franchisor how franchise territories are determined and if they are clearly defined.
- See what the Franchise Disclosure Document (FDD) says about protected territories and consider how the policies may affect you.
- Read what the FDD discloses about geographic restrictions in terms of sales or marketing.
- Ask the franchisor if you can choose your territory.
- Determine what are the advantages and disadvantages associated with each area.
- Request any available market research that points to projected profitability in a territory.
- Inquire about the possibility of opening additional franchises within your territory down the road.
One final suggestion? Ask existing franchise owners what they think of protected territories and how the franchisor has handled any issues in the past. Most franchisors will encourage you to speak to current franchisees as part of the discovery process. Use this opportunity to your best advantage!