Although without a doubt, franchises offer a “recipe for success”, in any sector, the practical aspects of all business models continue to be applied. As in a street saturated with stores selling the same products, the profitability of all establishments will be reduced; the franchisees operating in the same region will divide the profits, a fact that does not benefit either the franchisees or the central. For this reason, the concept of territorial exclusivity is created.
The purpose of territorial exclusivity is to protect the sales of your business, avoiding having to compete with another franchise of your same network that is geographically close. Through the granting of a different territory to each franchise, the franchise reduces to the maximum the competition between its associates and maximizes the profitability of each establishment, and consequently, of the network as a whole. Keep reading profitable small farm ideas.
How are the territories decided?
When a franchisor decides to enter a country or zone, the way to divide the territories depends on the business model and the market situation in that area. Sometimes they are divided by geographical lines (cities, provinces, etc.) and others by population density.
Although the size may seem the most appropriate criterion for establishing territories, this can lead to strategic errors, for example, creating territories that are too large. Initially, the plant may decide to create large territories, but with the growth of the business, they will need to reevaluate their decision and divide those territories into smaller ones, needing to find new franchisees. As a consequence, the plant must take into account all the information available before establishing the size of the territories.
Over time, the franchisors have been perfecting the decision-making process, trying to create territories that guarantee a strong income for their franchisees. Many times they look for external help for this topic.
What do you need to consider in a territory?
Many franchises offer their franchisees “territorial exclusivity” within the contract, although this is not always the case depending on the franchisor. The objective is that the franchise can operate in an area without direct competition from any other franchisee of the brand. The territory is usually determined by a geographical area, but it can also be designated based on a radius around the location of the establishment (shop, office, etc.).
Regardless of whether you are granted an exclusive territory or not, you need to be sure that you can get enough clients to develop your business successfully.
What are the objectives of territorial exclusivity?
When it comes to territories, bigger does not mean better. As a franchise, you can have a territory of the size of the European content at your disposal, but if you have few future clients, your business will be at risk. Therefore, in the territory there are people with interest in the products that you sell is of the utmost importance.
Franchisees should ask their franchisor about the following topics:
- How did you establish the territories?
- Are there other franchisees with territories of the same characteristics?
- If so, you will know that you are going to join a franchise with a territorial strategy that works.
What does territorial exclusivity provide?
According to European competitiveness legislation, there is no law that prevents the establishment of a franchise within the territory of another franchisee of the same brand. However, the conditions of the franchise agreement say that said franchise cannot be established outside the territory assigned to him. In other words, when acquiring a territory, only you can establish yourself to sell your products/services in that area.
Franchises without territorial exclusivity
It should not be assumed that an exclusive territory is an essential requirement for the success of a franchise. In fact, there are businesses that may have close competition without affecting their income. Look for example the proximity of many fast food restaurants in the cities.
Some questions you should ask about territorial exclusivity
- What is excluded/protected? Franchise agreements sometimes do not prohibit the franchisor from selling its products/services through alternative distribution channels, such as online.
- Is a zip code enough to protect a territory? It is important that the contract deals with the case of postal changes.
- How is the distance measured, in meters driven or according to a radius of action?
- Is the territory really exclusive?
- What intentions does the franchisor have in relation to the adjacent territory? What repercussions can it have in your territory?
- Are there grounds for removal of protections (eg lack of royalty payments, or other reasons (even minor ones)?
- Are there competitors in the exclusivity zone? How close are they? What competition is expected in the next 5 or 10 years?
- Is the territory large enough? Are there enough customers for the franchise to be successful?
Seek advice if you’re not sure
The franchisor, like the franchisees, is concerned that there is no competition between the different partners and also has a legal obligation to act in good faith by promoting fair agreements. The terms and conditions of territorial exclusivity must be reflected in the franchise agreement. As it is a complex aspect, and since you need to understand all the clauses perfectly before signing, it would be advisable that you contact an expert lawyer in this field.