franchising aspects Mar, 11 2010

Keeping the boundaries intact!

Protecting and safeguarding franchise territory is always recommended to the aspirants before signing the franchise deal. The article highlights the importance of exclusive territory rights for the franchisee

By Abha Garyali
Sub Editor
Keeping the boundaries intact!

Franchise territory is a restricted area, which is allocated to a particular franchisee to make his outlet popular in that area/locality. Most of the franchisees being new to the business world may not be familiar with the importance of a good location for the success of their business. Many of them also do not give prior importance to the franchise agreement and sign it without any negotiations with the franchisors. An important thing to be kept in mind while signing a deal is the exclusive territory rights. As said in the beginning, location of the outlet plays the most important part in the franchisee’s success. Therefore, as a franchisee be sure to select your location as well as maintain your territorial rights. It can be detrimental for any franchisee when there is another opening of the same brand in vicinity of the previous one due to lack of territory rights.

Need of franchise territorial rights

It is the franchisee who has to suffer if the franchisor himself opens or allows another franchise outlet in the proximity of the earlier one. An action like this by the franchisor may lead to low sales and slashed profits of the former outlet.  In such a situation, the only way left for the effected franchisee is to file a lawsuit against the franchisor. But he may be defeated in this due to lack of franchise laws as well as lack of evidence to prove his territorial boundaries. Safeguarding himself from such a situation lies only in the hands of the franchisee.

To safeguard against such situations, the franchisee needs to take the assistance of a qualified franchise attorney. Moreover, at his level he should keep in mind the below given pointers while dealing with the franchisor and the agreement.

Points to be remembered

  • Carefully read the franchise agreement: It is of utmost significance to read the franchise agreement. Clarify doubts by asking questions from the franchisor. Make it a point to add a clause about your exclusive franchise territory.
  • Do not fall for oral promises: Do not get carried away with oral promises by the franchisor. Lay your trust on the franchisor once he has given you everything in writing.
  • Exclusive territorial rights: Be clear about the exclusive territory rights offered to you as a franchisee. If you have taken an outlet in a mall, the franchisor should give you the assurance in the agreement that your outlet will be the solo one of his brand.
  • The role of the franchisor:  Find out if the franchisor determines the territory of his franchisees or they get to select their limit of the territorial rights themselves.
  • Negotiate with the franchisor: Try to negotiate with the franchisor about the boundaries of the territory, if he allows. Some franchisors have pre-determined boundaries while others may strike a deal with his franchisees on negotiable terms.
  • Be careful of any imposed rules: A few franchisors can impose minimum sales quotas or impose conditions on franchisees in order to retain territorial right. Be careful if your franchisor is one of them.
  • Acquisition of the company: If there is a merger or acquisition in the franchisor’s company, then it will affect your business too. If something like this occurs then the franchisor should be asked to compensate for your losses.
  • Know about the past of the franchisor: Do an extensive research about the franchisor. Find out if he was ever involved in any territory or other disputes with his franchisees.
  • Potential customers of your territory: Carry a research on the territory given to you. Find out if the people of that area can be your prospective customers. If you haven taken a franchise of a fast food and most of the people of that area are senior citizens then your outlet may not do so well. Therefore, study your area before hand.

Besides other factors, an exclusive territory right is critical for a business to run successfully. Other factors can also make or break a business. However, in order to gain good profits, the best thing for a franchisee is to strictly safeguard his exclusive territory rights.

Related: Mumbai top destination for investors

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