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Dec, 16 2013

Exclusivity rights come with a price

Prior to diving into the franchise pool for that perfect chunk of a franchise, make sure whether your franchise territory is exclusive or non-exclusive? If it's exclusive then same brand's franchise in the given territory won't let you affect your sales a

Are you looking at safeguarding your territorial rights? All you have to do is negotiate with your franchisor before signing the dotted line and run your business in a territory which you can call exclusively yours. But watch it; exclusivity also comes with a price, it's advisable for franchisees to seek exclusive rights wisely for a type of business or sector they wish to invest into. Operating a brand's franchise in exclusive territory can turn out to be a boon for a franchisee.  Before signing the dotted line, it's the franchisor's right whether he wants to grant brand's franchise rights in exclusive or non-exclusive territory.

Is your franchise territory exclusive?

If you succeed in negotiating to protect your exclusive territorial rights then you are definitely heading towards the right direction. If you do so then, you will be able to get quick returns which will be beneficial for you.

Every franchisee, when enters into a franchise agreement wishes that his defined territory is secured from the same brand's franchisees. Across sectors, there are franchisors who do not grant exclusive territorial rights to the franchisees. So before you get into franchise business, it's important that you do your home work  well in terms of knowing which all brands offer territorial rights. Elaborating on exclusive territorial rights Seema Jhingan, Partner, Lex Counsel Law Offices, says: “Exclusive territorial rights is a right granted in favor of the franchisee during the term of the franchise agreement to set up its franchise operations within the limits of a pre-agreed territory to the exclusion of others. This right forbids the franchisor to appoint additional franchisees in that territory even if the opportunity arises, i.e., the right is exercised to the exclusion of the franchisor itself and its owned centres. There is no defined or regulated area of territorial rights. It all depends on the mutually agreed contractual arrangement between the parties and the business of the franchise. It may extend to the whole of the country, state, city, and town or be limited to a few kilometers radius of the franchise operations depending on the business needs.”

Having same brand's outlets in a defined territory or location can turn out to be challenging for the franchisee as it may affect customer footfalls. In such a case, it's important for franchisee to negotiate on securing exclusive territorial rights where he wishes to operate the brand's store. A franchisee operating stores in same vicinity suffers as it affects each others' sales and customer walk-ins. Rest, it also depends on the quality standards and customer relations. Commenting on providing exclusive rights of brand, Anurag Poddar, Director, Presto Personalized Wonders, a brand of Mohan Impressions Pvt Ltd, informs: “We at Presto are of the philosophy that every additional outlet creates more brand awareness and propensity to purchase rather than being a competitor to an existing outlet's business. Of course, some basic principals have to be followed. For example, we never give two franchises in the same mall and in case of high-street; the distance between two outlets should be at least a kilometer if it is a CBD area in a metro. For smaller cities, this parameter goes up. Other factors like location of the existing store, its size etc has to be considered.”

Pros & cons of an exclusive territory

There are various pros and cons of exclusive territorial rights. The major advantage of offering exclusive territorial rights is that a franchisee is secured and he/she is able to create his own market. Anurag says, “I feel that this process should be gradual and the franchisee has to balance it with a committed value of business.”

If you are looking at expanding aggressively then picking the right location is what that actually matters for the success of a franchise business. Agreeing on the same, Gowree Gokhale of Nishith Desai Associates (Legal & Tax Counseling Worldwide) says: “Location does play a strategic role in business growth and thus, generally, franchisors lay a lot of stress on choosing the right place for opening an outlet.  While the franchisor may allow the franchisee to select the outlet location within a given locality, it is not uncommon for franchisors to approve the location beforehand and also periodically inspect the premises on regular intervals, so as to be sure about the ease of access for customer, visibility of the outlet, and the popularity of the location etc.”

On the flip side, running a brand's franchise in an exclusive territory is beneficial for franchisee but it may further confine the brand development strategy for the franchisor until the completion of term of franchise agreement. So, it's solely the franchisor's decision whether he wants to grow his brand's franchise in exclusive or non-exclusive territory. Gowree thinks: “Having an exclusive franchisee may restrict growth and expansion options for the franchisor, hence depending upon the nature of the franchise exclusivity vis-à-vis non-exclusivity would need to be evaluated on a case to basis.”

On the contrary, Seema Jhingan strongly adds: “Exclusive territorial rights are best avoided as it proscribes and curtails the right of the franchisor to appoint additional franchisees or even establish self owned centres in the agreed area. In cases, where the franchisee is not very aggressive or beneficial in revenue terms for the franchisor, the franchisor gets stuck with this franchise till the agreement is terminated. This may impact the growth of franchise business of the franchisor in the agreed territory.” She also adds: “Exclusivity also sometimes makes the franchisee relaxed as in the absence of any competition in the territory, the franchisee exerts less than best efforts. However exclusivity on the other hand, also sparks the spirit of entrepreneurship in the franchisee to expand as much possible in the exclusive territory and enables the franchise business to grow which in turn helps the franchisor in revenue sharing.”

Advice for franchisees

As per experts' viewpoint, the right of giving exclusive rights to operate brand's stores in a given territory is vested with the franchisor only. If a franchisee is looking at taking franchise then he/she must do their study well so as to understand whether taking up exclusive territorial rights would turn out to be beneficial for them or not. It depends more on the franchisee's choice. By elaborating her view through an example, Gowree strongly feels: “Having an exclusive territorial arrangement may be important if the franchise is of a pre-school chain or is in the retail business. However, situation may be different if the franchise is of a food outlet or say a florist shop as the customers usually like to visit a place which is nearest to them. In such a case, territorial exclusivity may not be so important. Having said that, it's best to study the customer market and the industry trends in which franchise is being taken before insisting on an exclusive territorial arrangement.” While Seema thinks differently on the concept of securing exclusive territorial rights. She advices: “Negotiate for a larger territory as it helps in cementing and consolidating the franchise business from undue competition in the early years of establishment. You may start with seeking exclusivity for a large area but as the negotiations proceed, the franchisor would agree for some exclusivity even though not as large as previously sought. Exclusivity rights come with a price, i.e., a higher initial franchise fee payable to the franchisor, therefore seek exclusivity wisely and not beyond what is reasonably required. For instance, exclusivity for an area of 4-5 km for a fast food outlet is reasonable and 8-10 kms for a K-12 school. Seeking exclusivity for the entire city for a fast food centre and paying a higher exclusivity fee may not generate additional revenue for the outlet as eating joints are area/locality specific.”

Instead of smaller locations, exclusive rights for territory work well in terms of master franchise and area development agreements as they require a large territory for spreading brand's wings.

Gowree highlights: “Another important aspect to consider here is that franchisors typically require a minimum guarantee / minimum commitment on revenue from the franchisee, which escalates on a yearly basis.  There may be penalties on the franchisee is they fail to meet the minimum commitment. Thus, having multiple outlets in the same locality may sometime make it difficult for the franchisee to meet the targets vis-à-vis an exclusive franchisee. On the other hand, the exclusivity may have its own premium.”

In order to sum it up in few words, it's not about having or not having an exclusive territory rather it depends on franchisee's entrepreneurial capability, business acumen and the efforts he puts in his business to make it sustainable and successful. It's up to the franchisee as which sector he/she decides to venture into. So before you move further to protect your exclusive rights, evaluate the type of franchise you are seeking, and be sure to ask the existing franchisees whether it’s best to operate in an exclusive territory structure is fair and reasonable. If in doubt, it's always an apt choice to consult your franchise attorney and then negotiate with your franchisor.

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