You are planning to buy a franchise, and one of the benefits you are most looking forward to is the fact that you will have an exclusive territory. Once you sign your franchise agreement and pay the initial franchise fee, you will be the only one operating under your franchisor’s trusted brand and proven business system for miles around.
But, is your territory really exclusive? Not all franchisors offer exclusive rights, and those that do not are not necessarily forthcoming about the limited protections they offer (if they offer any at all). Here are some important considerations to keep in mind when trying to interpret the territory provision of your franchise agreement:
4 Ways Territory Rights Not Be What They Seem
1. Your Territory is Protected but Not Exclusive.
Many franchisors offer territory rights that are protected but fall short of being truly exclusive. The most common example of this is a reservation of rights for the franchisor to sell, “through alternate channels of distribution.” The territory may even be labeled as “exclusive,” and then have this carved out as an exception.
2. Your Territory is Not Protected at All.
Some territory provisions are written to exclusively protect the franchisor. Consider this: “Franchisee’s territory (the ‘Territory’) is the geographic area within a two-mile radius of the franchised outlet. Franchisee may not sell outside of the Territory without Franchisor’s express written consent.”
This provision “grants” a territory, but what does it really say? There is no protection, and all it really does is limit the franchisee’s target market.
3. The Territory Definition is Ambiguous.
Even if your franchise agreement says that you are entitled to an exclusive territory with a two-mile radius, what exactly does this mean? Two miles by road, or “as the crow flies”? Depending upon where your franchised outlet will be located, these could provide drastically different amounts of protection.
If your territory is defined by ZIP codes, what happens when the boundary lines change and your territory suddenly shrinks in size? Both radius-based and ZIP-code based territory definitions should be carefully written to ensure that there is no room for disagreement over the franchisee’s territorial rights.
4. Your Franchisor Can Reduce (or Eliminate) Your Territory.
In some cases, franchisors will reserve the right to reduce franchisees’ territory (typically by an undisclosed amount) or even eliminate franchisees’ territorial rights if they fail to meet their contractual obligations. This includes failure to pay royalties and other breaches, many of which are often fairly minor. While a new franchisee may be reluctant to step into an existing franchisee’s territory, franchisors commonly use these provisions as mechanisms to force struggling franchisees out of their systems.
Speak with National Franchise Attorney Jeffrey M. Goldstein
If you are considering a franchise opportunity, it is critical to have an experienced franchise attorney review the terms of your franchise agreement. Jeffrey M. Goldstein is a franchise lawyer with over 30 years’ experience who represents new and existing franchisees nationwide. To find out what your franchise agreement really says about your territory, and to find out if you may be able to negotiate for better protections, please call (202) 293-3947 or request a free consultation online today.
