While not universal, protected territories are common in the franchising industry. As noted in an article on Chron, more than 90 percent of successful franchises use the territory concept according to one study.
The concept explained
At first glance, many prospective franchisees endorse a protected territory. They believe that the larger their territory, the more insulated they’ll be from other franchisees, the less competition for their products and services and, ultimately, the greater the potential for growth and success.
But too large a territory has its potential pitfalls. Consider a home-services franchise such as one for maids or pest control. Highly dependent on vehicle utilization, it could hardly achieve efficient operations or good brand visibility if it covered an extensive area.
Two common options
Before committing to a franchise, read Section 12 of your Franchise Disclosure Document (FDD) — ideally in the company of your attorney. The FDD is the main legal document for detailing (in writing) your territory rights. In it, you may encounter variations of two different options:
- Exclusive Territories: If your territory is truly exclusive, your franchise will be the only source of the franchisor’s goods or services in a defined area. By the way, territories are usually described in geographical terms such as by area code, street or waterway boundaries. At other times, they are described as a specified radius in miles (or kilometers) originating from the location of your unit where the franchisor would not be allowed to have another location.
- Unprotected, non-exclusive Territories: Some franchise networks do not offer any territorial protection at all. In these systems, a franchisor is free to open competing outlets and employ alternative channels wherever it pleases. Proceed with caution! While you may at first be willing to trust your franchisor not to “cannibalize” your operation, a lack of territorial protection can create a significant business risk for franchisees over the long term, especially if the network grows.
Questions to address
With your attorney at your side and FDD in front of you, consider these questions:
- How is the franchise territory defined? Many are defined by zip codes, population, number of qualified households, business counts or similar factors while others may be determined based upon specific demographics.
- Does the franchise network have a consistent method for defining territories? Regarding the consideration noted above, note that populations and demographics change over time. Also, be aware that a lack of detail and consistency may extend to other areas of a franchisor’s operation — a potentially troubling fact!
- What are the demographics that are employed to define a territory? A population aged 65 and older could affect a homecare operation. The number of families with small children might influence a daycare franchise.
- Will your territory be exclusive, protected … or neither? Some franchise networks will let a franchisee market into an “open” territory until it’s franchised. But what happens to you (and the clients you’ve gained) if the open territory later is awarded to another franchise? Some franchisors require you to relinquish your hard-won customers to the newcomer, while other networks enable you to retain them.
- What about alternative distribution channels? Does the franchisor reserve the right to sell directly to customers regardless of where they may reside—even if in your “territory?” With the popularity of e-commerce sales, such conflicts are becoming more common. The franchisor may retain the right to sell their products in your territory through supermarkets and other retail outlets.
The bottom line?
When you and your attorney review the FDD focus on Section 12 regarding territories. As with any franchise, you’ll want to be sure what you’re getting into—and that certainly includes the territory that may — or may not — help define your opportunity!
A word on territories with Allegra Marketing Print Mail franchises.
Allegra franchises are awarded territories. These are based on the Center’s physical location. Your exclusive territory encompasses an area of at least 4,000 businesses having revenues greater than $250,000. For complete information, please see section 12 of our Franchise Disclosure Document.