Advisory Sep, 02 2011

Seal your franchise territory before it’s too late

Territory plays a significant role in making a business successful for the franchisee. Any issue arising out of territorial disputes between the franchisors and the franchisees is a cause of concern. Resolving these issues at the initial stage is the best

By Abha Garyali
Sub Editor
Seal your franchise territory before it’s too late

Ideally whenever an entrepreneur is signed as a franchisee by the franchisor, he is assigned a particular territory where he opens and operates the franchised outlet. He enjoys complete exclusivity in the territory with no other outlet or franchisee of the same brand in its close proximity. It is generally understood by the new franchisees whether it is included in the franchise agreement or not. The problem arises when franchisor signs up another franchisee in the same territory and gives him the right to open and operate as a franchisee of the same brand.  In such a situation the old franchisee may feel cheated and develops strained relations with the franchisor. Franchisor might have done it intentionally or unintentionally, but it is the franchisee that is at loss. It not just affects the sales and increases competition but also dampens the footfall and the reputation of the old franchisee. Also it is the biggest cause of concern as it develops mistrust among the franchisees towards the franchisor.

What are Territorial rights?

In case of franchising, territorial rights refer to the extension till where another franchisee can open his outlet of the same brand. Every franchisor takes up franchising with an aim to deeply penetrate the market for maximum sales and profits. This can be done adequately if franchisees are offered sufficient territory to establish their foothold and make high profits with limited competition from the same brand. But in certain cases it is seen that a franchisor in a hurry to expand his business and earn more may allow another franchise outlet in his previous franchisee’s   territory.  This is where a franchisee needs to be careful and exert his rights.  Therefore it is imperative for any aspiring franchisee to set his territorial limits with the franchisor before getting into the process and opening his outlet. A franchisee must know that there are two kinds of territorial rights. These are:

Exclusive territory: As its name suggests it offers exclusive rights to a franchisee to open his outlet in a certain given location. This gives the advantage of a guaranteed client base with no threat of competition. However it has its negative side also. In this franchisee’s are allowed to market their outlet in the given territory. The franchisor might define the exclusive territory as a very small area, which will further be a greater problem when the franchisee will not be able to advertise out of the defined boundaries.

Non-exclusive territory: In this the franchisee will not get any rights for an exclusive outlet. An outlet can be opened and operated in other franchise territories, with no guarantee that another franchised outlet cannot be opened in the same location. Other franchisees can also open their outlet near to the previous one. Increased competition is a situation can lead to a drop in your share of profits. However non-exclusive territory offers a lot of marketing and advertising freedom to access a larger client base.

Safeguards for the franchisees

An aspiring franchisee needs to safeguard him in case of territory infringement at the time of signing the franchise agreement. A franchisee needs to address the following clauses in the franchise agreement. These can put the franchisee in a better place in case of any infringement or dispute with franchisor. Few clauses are given below:

  • Kind of territory: Franchisees need to ensure whether they are getting into exclusive or non-exclusive territory. They should be adequately aware about the benefits and disadvantages of both of these before signing the agreement.
  • Right of first refusal: As a franchisee, you should have the ‘right of first refusal’ clause according to which the existing franchisee (that is you) would get the foremost option to take over the new territory before it is offered to anyone else.
  • Course of action in case of infringement: Franchisees while signing the agreement should keep in mind to add a clause about the actions that can be taken in case of infringement in their franchise territory. This will make the franchisor more careful not to break their word of opening another outlet near the previous one.
  • Re-negotiation regarding franchise territory: The possibility of future re-negotiation regarding the territory should also be added as one of the clauses. Franchisees need to keep open their doors if they want to change exclusive territory rights to non-exclusive or vice-versa.
  • History of franchisor: Franchisees must view and analyse the history of franchisor in case of any disputes in the past. Moreover they should find out how he had handled all the allegations and disputes.

Keep your eyes wide open

It is a must for aspiring entrepreneurs not to trust franchisors without getting each detail about the agreement in writing. It is a complete ‘NO’ to believe the words of any franchisor, however good his reputation is, without it being written and signed. All rights that have been promised by the franchisor should not be left to the goodwill of his word by mouth. Moreover getting a franchise attorney into the picture to read and analyse the agreement should be considered important.

Follow the saying ‘Prevention is better than cure’ before finalising on any franchise. It is better to take adequate precautions before jumping on the road to become a successful franchisee.

Related: How to part ways with a shake hand

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