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franchising aspects 2009-09-23

Franchise territory cause of concern

Are you witnessing a situation where a new outlet of the same brand as yours is being set up in your vicinity. Well to ensure that this does not happen to you, address the territorial issue before signing the franchise agreement. Read on to know what all

By Sub Editor, Franchise India Holdings Limited, Web Division
Franchise territory cause of concern

A franchise is taken up to gain profits and provide a financial stability. Gaining specific territorial rights is a must when taking up a franchise to fulfil the motive of gaining profit (Though that’s not just the reason for gaining profits). As a franchisee, you need to address this issue from your end.

Types of territorial rights

Most commonly there are two kinds of territorial rights that are available for a franchisee. These are:

Exclusive territory: In this kind of an arrangement, you can be the only franchisee operating in a given area. This gives you the advantage of a guaranteed client base with no threat of competition. However looking at the grim side, the franchisor might define the exclusive territory as a very small area and which will further tie up your hands to market yourself out of the defined boundaries.

Non exclusive territory: In a non exclusive territory, you can operate in other franchise territories and other franchisees may also operate in your franchise territory. The advantage is that this arrangement poses marketing and advertising freedom giving you an access to a larger client base. Increased competition is a situation which you can witness in an above mentioned situation and which can lead to a drop in your share of profits.

Franchise agreement clauses

To be at the safe end, you need to address the following clauses in your franchise agreement. These will put you in a better place in case of any infringement or dispute.

  • You need to ensure what territorial agreement you are signing? Is it exclusive or non exclusive? The definition of exclusivity needs to be well defined.
  • You should have the “right of first refusal” clause according to which the existing franchisee gets the foremost option to take over the new territory before it is offered to anyone else.
  • Infringement which may arise due to mergers or acquisitions should state in detail what would be the course of action in such a situation for you.
  • The possibility of future re-negotiation regarding the territory should also be talked about.
  • You must view and analyse the history of how the franchisor handled territory disputes in the past.

Words of caution

Whatsoever may be the reputation of the franchisor, you need to ensure that you have everything in writing. All your rights that have been promised by the franchisor should not be left to the goodwill of his word by mouth, have everything spelled out in the franchise document and make sure you have your lawyer takes a thorough look at it.

Prevention is better than cure fits so aptly to this situation. Go ahead, take the measures and enjoy your road to being a successful franchisee!

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