How Do Franchise Territories Work?

Many, but not all, franchises grant an “exclusive territory” to their franchisees as part of the rights given under the franchise agreement. The purpose of doing this is to assure the franchisee that they will have some area in which they can market and operate under the franchise brand without any competition from another franchisee or even the franchise company itself.

This territory is normally described in geographical terms (zip code, street or waterway boundaries, etc.) though it can also be described as a specified radius originating from the actual location of your unit. Regardless of the method used to define the boundaries of the territory, the message implied by the territory award is always the same. In a nutshell, you’re being told that this area is large enough and has a sufficient number of potential customers to enable you to build a successful business for yourself.

This is where a conflict can come into play. As the franchise system continues to grow, the franchisor will often desire to increase their number of distribution points by adding as many additional units into the market as possible. Sometimes these units can cannibalize the sales of existing units, temporarily or permanently. That “encroachment” can cause a lot of ill will among the existing franchisees. Whenever you are evaluating any franchise, be sure to ask the existing operators whether they feel that the territory structure is fair and reasonable, and ask them as well as the franchisor whether there is an appeal process in place to allow for the resolution of any new unit impact conflicts without having to resort to litigation. These types of steps can help ensure that you are selecting a franchise with a strong sensitivity to these sorts of potential issues.

What is Franchise Exclusivity?

Because franchisees pay a franchise fee and ongoing royalties, the franchisor wants to ensure the franchisee makes enough money. As a result, most franchises assign each franchisee a territory in which the franchisee has exclusivity.

Let’s use McDonald’s as an example. Maybe you’re planning to become a McDonald’s franchisee. Exclusivity simply means that no other McDonald’s can be built within a certain radius of your restaurant. That means another franchisee cannot just move in down the block and take customers from your restaurant.

How is a Franchise Territory Decided?

Mapping territory to be divided among franchisees can be tricky and some franchises just don’t get it right. However, there are several factors that go into mapping territories, including the success of the franchise. A globally successful franchise like McDonald’s will typically offer much smaller territories because they are so popular and so well-known that getting customers into the door is pretty easy. So, you may find a McDonald’s in relatively close proximity anywhere you go in the world.

However, Bob’s Burger Pagoda may offer a larger territory because it isn’t as well-known, which means a franchisee may need a larger territory to bring in a sufficient amount of business.

Many franchises also use mapping programs that allow them to analyze the best way to divide a city or even a region, taking into consideration such factors as population and distance between franchises.

What Questions Should I Ask a Franchise?

Before settling on a franchise, be sure to answer the following questions:

• Are territories exclusive or non-exclusive? (Non-exclusive means another franchisee can move into your area.)
• How does the franchisor map the franchisees’ territories?
• Is the population in your potential territory large enough to run a viable business?
• Will you be permitted to choose your own territory?
• How close will the nearest franchisee be situated?
• Will you be permitted to open another location in the future?