Buying a franchise means launching a business that has the framework of a bigger company around it. You can expect tons of support from your franchisor, but what about competition? As a prospective franchise owner, it’s critical that you know everything you can about territories and how they can make or effectively break your franchise.
In this article, written by SMBCEO on behalf of F45 Training, we’ll discuss the meat and bones of what you need to know about franchise territories before you get started.
Franchise Territories, Defined
First of all, what defines a territory? A territory was once considered a geographic area, and while this is much of the case today, a territory can also be determined by demographics. Thanks to the digital age, online franchises can target certain audiences across geographic areas.
A territory is important because it defines where you’ll be operating as a franchise, as well as where your franchisor can and cannot sell a franchise to another franchisee.
Types of Franchise Territories
There are a number of different territory terms to watch out for.
1. Exclusive territory
One of the most common kinds of territories that you’ll come across is the exclusive territory, which is granted by companies such as the F45 franchise. This is highly desirable, as it reduces the likelihood of immediate competition.
With the exclusive territory, your franchisor is contractually obligated not to establish another franchise in your territory. If you are looking to find a franchise like this, we recommend considering something like a home services franchise rather than a fast-food franchise with non-exclusive territories. While this does eliminate the possibility of immediate competition from other franchisees, it doesn’t completely squash competition. Another franchise of a different company, or a small business, could easily pop up and change the landscape of your franchise.
2. Non-exclusive territory
The second most common kind of franchise territory is the non-exclusive territory. With the non-exclusive territory, the franchisor still sets forth an area in which your franchise can trade, but it makes no guarantee that another franchise won’t be set up in your area. For some franchises, this isn’t a bad idea, but saturation can be a concern. A franchisor that’s quick to put many franchises in one area might make more money at first, but down the line, the decision may have negative consequences. It can be problematic for you to own a franchise in an oversaturated area.
Before signing anything, it’s very important that you hire a lawyer experienced in franchise law. Your lawyer can help navigate through your Franchise Disclosure Agreement, which outlines all of the finer details of your relationship with your franchisor. It’s critical to know your rights, as well as the rights of your franchisor, before you sign on the dotted line.
There are a number of things you’ll want to know about your agreement before proceeding. For instance, what defines your territory? Is your territory a certain zip code or demographic? How are territories determined? Look for a policy that determines territories to ensure growth. Is your territory open or is it protected? You want to be sure you know what you’re walking into.
Becoming a franchisee is a big responsibility, as you are becoming a full-fledged business owner. Knowing your territory is critical when considering a franchise.
It’s also wise to remember that most Franchise Agreements allow for the franchisor to change the territory at any time. These changes are typically made in response to growth, but you should ask what the conditions for changing the territory would typically be. Your lawyer can help you determine whether this information is clearly outlined in your Franchise Disclosure Agreement.
Identifying that you have territorial protection before you invest in a franchise is a good business practice. You’ll want to ensure the longevity of your business, and that means making sure that you can trust your franchisor not to allow too many other franchises to launch in your territory. If a question around territory is left unanswered, then you could be better off walking away.
When looking at a new franchise opportunity, there are a number of factors you have to watch out for. For instance, royalty payments, mediation/litigation, and right to close are all things that should be outlined in your agreement. One of the biggest things, though, is territory.
Knowing the basics of territories can help you better decide which franchise opportunity is best for you.