As a franchisee (or prospective franchisee), among the many important issues you need to consider is the question of geographic protection. When you buy a franchise, you expect to benefit from the franchisor’s brand, systems and goodwill, and the last thing you want is for another franchisee – or even the franchisor – to end up using these against you.
When many people hear that they have a “territory,” they assume this means that their territory is exclusive—that is, that no one else within the franchise system will be able to compete against them in their territory. Unfortunately, this isn’t always the case, and the actual territorial rights that are offered (if any) often are not clear in the franchise agreement or the Franchise Disclosure Document (FDD).
Exclusive vs. Protected Territories
Although they are often used interchangeably, “exclusive” and “protected” can actually have different meanings in the franchise context. If your franchise territory is truly exclusive, your business should be the only source of the franchisor’s goods or services in the territory. On the other hand, if your territory is merely protected, then your franchise agreement may authorize certain forms of competition, such as franchisor sales through alternative channels of distribution (i.e. the internet).
As a third option, some franchise systems do not offer any territorial protection at all. In these systems, the franchisor is free to open competing outlets and use alternative channels wherever it pleases. While you may initially be willing to trust your franchisor not to “cannibalize” your franchise, over the long term, a lack of territorial protection can create a significant business risk for franchisees.
Of course, the size of your territory comes into play as well. If your exclusive territory is only a 20-yard radius, as a practical matter it is not going to do you any good. While this is an extreme example, as you expand to a mile radius, a two-mile radius or maybe a small urban ZIP code, where do you (literally) draw the line and say that you are adequately protected? This is a challenging question, and one that will typically require the advice of an experienced franchise attorney or advisor.
Determining and Enforcing Your Territorial Rights
So, how do you know if your territory is exclusive or protected (or non-existent)? The answer is simple: You need to review the terms of your franchise agreement. If you are evaluating a potential franchise opportunity, you should have an experienced franchise attorney review the franchise agreement and the FDD to make sure you have a clear understanding of what the franchisor is offering. Depending on the size and maturity of the system, you may even be able to negotiate for a larger territory or greater territorial protections.
If you already own a franchise and are dealing with an encroachment issue, again, the first step is to make sure you have a clear understanding of your contractual rights. If indeed the franchisor or another franchisee is encroaching on your territory, you will need to assess your options and act quickly to mitigate the damage.
Contact National Franchise Lawyer Jeffrey M. Goldstein
For more information about negotiating a franchise agreement or enforcing your existing territorial rights, contact Goldstein Law Firm for a free, confidential consultation. Call (202) 293-3947 or contact us online to schedule an appointment with attorney Jeff Goldstein today.
