Mark your territory

Many franchisees have a franchise territory - a defined area in which they are allowed to operate in. Andrew Hayward explains how territorial issues may arise between franchisees and franchisors, and how they can be avoided

Humans are territorial creatures. Wars have been and continue to be fought over territorial dividing lines whether they are national borders or garden fences. It is not surprising therefore that the selection and delineation of franchise territories and the respective rights and obligations of a franchisor and franchisee can raise some contentious issues.

New franchises

A franchisor can be keen to expand a franchise network as quickly as possible and, in the early stages, it is tempting to grant larger territories to each franchisee. Very often this suits new franchisees who may believe territorial size is directly correlated to revenue and profit.

For both parties, this is a dangerously simplistic view. When considering the number of franchised territories in any given area such as England and Wales there is an obvious balance to be struck between giving each franchisee a sufficiently sized territory in which they have the right to market its franchised business without directly competitive active marketing from other franchisees on the one hand, and the establishment of sufficient branches or outlets of the franchised business to achieve the levels of brand recognition desired by the franchisor.

Problems can arise if too many franchises are granted with exclusive marketing territories within the same town or city and so the profitability of each franchisee will suffer to the point where the businesses are unsustainable.

If on the other hand a franchise territory is too large, a single franchisee simply will not be able to exploit the area fully or profitably.

Furthermore, the grant of large initial territories can ultimately prove a barrier to expansion. If, for example, a franchise has already been granted for the whole of Hampshire and prospective franchisees come along later looking to establish territories in Winchester and Basingstoke, such territories will be unavailable. The franchisor is in the unenviable position of having a queue of eager prospective franchisees with nothing to offer them.

As a solution, a franchisor could divide a large area sought by a franchisee into a number of smaller territories that match more closely with what the franchisor considers to be appropriate sized marketing areas capable of proper exploitation by a franchisee.

Ideally all territories within a national area will have been delineated before granting any franchises. Naturally enough the territory map can be flexible to a certain extent but the bottom line is that each territory needs to have a sufficient prospective customer base for the franchisee to exploit profitably, while not being over-sized.

Exclusivity

This is perhaps one of the most contentious issues arising in relation to territory. Franchisees do not generally take kindly to neighbours in the network or indeed the franchisor doing business ‘on their patch'. Franchised territories are often described as ‘exclusive' in preliminary discussions, however there are degrees of ‘exclusivity'.

The franchisee may assume that an ‘exclusive' territory is one in which it will be the only business supplying the franchised goods or services to customers, to the exclusion of both the franchisor and all other franchisees. In many cases that is not what will be reflected in the franchise agreement. While it may provide that the franchisor will not grant any other franchises within the franchisee's ‘exclusive' territory and that the franchisee enjoys the sole right to market and promote its business within that area, it will not generally prevent either the franchisor or other franchisees from selling or supplying goods or services to customers within that territory if those customers choose to approach the franchisor or a neighbouring franchisee instead of the local supplier.

It is therefore important in preliminary discussions that both parties understand what it is they are giving and getting in relation to territory and, just as crucially, what they are not. If both parties go into the arrangement with their eyes open then there is less risk of dissatisfaction and discord at a later date.

The ‘perfect' territory is a common goal of both franchisor and franchisee. From a legal perspective it is key to the success of any franchise that sensible provisions are contained in the franchise agreement relating to territory and the rights and obligations of both franchisor and franchisee in relation to it. If a careful consideration of territorial size, location and those legal rights and obligations is undertaken early on there is every chance that territory-related disputes can be avoided altogether.

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