You have decided to buy a franchised business. As a part of this you receive a copy of the franchise agreement, but you are unsure about your obligations. Our series ‘aspects of a franchise agreement’ will provide clarity on the main parts of a franchise agreement.
Your franchise agreement should clearly set out your territory. Franchisors would have already divided up the country (or state) into concise and separate territories which will be allocated to each franchisee. You should look carefully at the details of the territory to ensure it matches what you have discussed with the franchisor.
When we use the word territory, we mean a specific area where you will be able to conduct the franchised business. If the premises is within a shopping mall what will be the territory? Is it just the mall or does it include the area surrounding the mall? Ideally your territory should be identified on a map with clear boundary lines.
There are two types of territory:
Exclusive. The franchisor is not permitted to appoint another franchisee within your territory.
Non-exclusive. The franchisor can appoint another franchisee in your territory, subject to offering the new location within the territory to you first.
Some franchise systems prescribe no territories at all. If that is the case with your business, then you should be concerned about the saturation of the area of your proposed franchised business. This is especially relevant when in the case of a new system there are no actual (as opposed to hypothetical or anticipated) figures to justify a viable business. You could request a limit on the number of franchisees to operate in the area although this can also be counterproductive because it may stop the establishment of and/or the growing of brand awareness to the public.
Premises and territory are two separate matters. You can have a premises within a territory. If you move premises during the term of the franchise agreement but it is still within the territory, then that move will not be considered an assignment or transfer under the franchise agreement. However, franchise agreements usually contain a requirement that you must have the prior written approval of the franchisor in regard to any alternative premises.
Your territory can become non-exclusive or be modified if you do not comply with the terms of your agreement – for example minimum performance criteria or if the franchisor, having reviewed your performance feels you are not adequately servicing the territory. Should this occur, it must be subject to consultation with both parties.
In conclusion, you should always take great care when reviewing the territory and you must know what you are getting in relation to a territory or area.