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In franchising, franchisors can grant exclusive territory rights to their franchisees. These rights allow franchisees to operate in a specific area without competition from other franchisees of the same brand. As a result, the franchise network can maximise its profits and establish steady market catchments. This article explains exclusive territory rights and how franchisors give these to franchisees.
What Are Exclusive Territory Rights?
As a franchisee, having exclusive territory means only you can operate the franchised brand within your defined territory. If you have territorial exclusivity, your franchisor cannot allow another franchisee of the same network to open a unit or operate within your area.
Multiple franchisees of the same brand operating in the same area can have a detrimental effect on their businesses. A saturated territory can reduce your customer base, which will affect your unit’s profit and level of income.
What is the Scope of Exclusivity?
However, not all franchisors grant territory rights to their franchisees since granting such rights is not a legal requirement. Additionally, the scope of exclusive territory can vary drastically across different brands. A franchisee may enjoy exclusivity of:
- the whole country;
- a region;
- a county;
- a street; or
- just one store.
Whether exclusivity is necessary depends on the products or services you supply. The type of franchise you operate can also impact its territorial needs. Your business’ needs will vary depending on whether you operate online, from a brick-and-mortar store, or mobile.
Finally, the area your franchise operates within can impact the level of exclusivity you need. For example, there are hundreds of Pret-A-Manger cafes in London but none in more rural areas. In cities, there are many more potential customers for a cafe franchise. It matters less that London-based Pret units are closely packed together in hotspots as there are plenty of customers. The same concentration of cafes would be impractical in the quiet countryside where the population is far less dense.
How Does a Franchisor Grant Exclusive Territory Rights?
If a franchisor grants you territory rights, they will do this through the franchise agreement. A franchisor will give you the agreement to read before you become a franchisee. How franchisors phrase the right can vary across different franchises. It is essential to read and understand the agreement as it is legally binding and will determine the scope of your rights as a franchisee.
1. Check Your Rights
Before signing a franchise agreement, it is vital to understand your territory rights. First, check that you will receive territory rights. Then, check the scope of the rights and whether the franchisor has clearly defined them. Understand whether the franchisor can withdraw your rights. For example, retaining your territory rights may depend on your unit reaching specified performance targets.
You should also conduct market research yourself and determine if you have a reasonable territory to operate within. Franchisors should carefully consider the market and demographics of each new location, as every area is different. What might work well in one market may saturate another. Too many franchisees from the same network can negatively impact the franchisor’s brand.
If you are unhappy with your territory rights or lack thereof, consider negotiating them with the franchisor. If the franchisor does not grant you exclusive territory, you should:
- research the proposed area; and
- establish the competition any local franchisees will pose to your business.
Also, you should speak to franchisees within the network. Your discussions can help you find out whether your business may be practicable and profitable. Be aware that the franchisor can introduce more franchisees within or near the area you operate in the future.
2. Disputes Over Territory
If you encounter territory-related issues, you should speak to your franchisor. Territory rights are a common cause of franchise disputes. For example, disputes relating to territory can arise if:
- a franchisee misunderstands their rights;
- the franchisor does not clearly define the scope of the rights; and
- the franchisor breaches an existing franchisee’s by allowing another franchisee to operate within their exclusive radius.
To avoid such disputes, it is important that you understand the scope of exclusivity rights before signing the franchise agreement.
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Key Takeaways
Exclusive territory rights are rights that franchisees obtain when they sign the franchise agreement. Having exclusive territory means your franchisor will not allow another franchisee from the same network to operate in your designated area. Prospective franchisees should remember that not all franchisors provide exclusive territory. Carefully read the franchise agreement and understand what exclusivity rights you will obtain. Other franchisees operating the same brand in your area can impact your business.
If you require advice about your franchise territory rights, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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