Uncharted Territories: Understanding a Franchise’s Territorial Rights

When purchasing a franchise, there are a range of restrictions and regulations that can come with the area of operation. For both brick-and-mortar stores and mobile franchise operations, there should be a “territory” associated with the purchase. Often, this is understood as the area in which the franchisee may operate. Some prospective franchise owners may also think that they have sole ownership of or access to the territory, but that is not always the case.

Not all franchise agreements are created equal, and understanding the territorial rights associated with the purchase is a crucial step. There are three primary kinds of franchise territories:

• Protected territory: Franchisees can open additional locations. Some franchise agreements will outline rules surrounding encroachment, which can restrict the flexibility provided to other franchisees looking to open additional units.
• Exclusive territory: Only the designated owner can open locations. However, franchisees must still execute new franchise agreements for subsequent developments within the exclusive territory.
• Open territory: The franchise owner has no protections. Other franchisees and the corporate team are both legally allowed to open additional locations within a close geographical range.

Franchise territories can be defined by county lines, ZIP codes, street names and any other markers that create a clear boundary as determined by the franchisor.

A lack of territorial protections can be detrimental to the health of the system, as illustrated by Subway. Amidst a long list of franchisee complaints and other questionable business practices from the sandwich chain is a concern about lack of territorial protection. According to Business Insider, “experts and franchisees say that Subway’s problems stem from its franchise system, which encourages franchisees to open thousands of inexpensive sandwich shops, often close enough to each other to cannibalize sales.”

What This Means for Franchisors

The type of territorial protections a franchisee should expect to receive can play a major role in a decision to invest. As such, franchisors should consider what type of territory model they’d like to embrace. This information will be necessary to build out Item 12 on the Franchise Disclosure Document.

When developing the disclosure document and franchise agreements, franchisors should work with a franchise attorney to ensure all possible details are included and contingencies are expressed clearly.

What Franchisees Should Know

While hiring an expert to walk through disclosure documents or franchise agreements with you can feel like an investment, the upfront cost for a franchise attorney is worth fully understanding what you’re agreeing to. In some cases, this expertise comes at a small cost relative to the time and trouble that will be avoided in the long run.

One of the most important details to consider in this evaluation process is the nature of an open territory. Even with an open territory, if a franchisor is able to establish a location in an area where there is existing brand awareness and is confident in its ability to effectively market and outperform any existing locations, a few unhappy franchisees may be seen as a small price to pay for the procurement of millions of dollars in unit-level sales each year.

Predetermined franchise territories can provide great value to owners, especially when they sign a multi-unit deal, committing to develop a given territory in the future without the requirement to capitalize the growth immediately. Similarly, territories can benefit franchisors, assuming the corporate team draws lines and protects franchisees and their territories appropriately. 

When done correctly, territorial rights benefit each individual location’s ability to scale and continue to exceed. Ultimately, this drives the entire system forward.