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Exploring territorial protections

snell2By Peter Snell
This column will continue to explore different aspects of the franchise agreement, to give you a better understanding of its basic elements. We will look at territorial protection and the related provisions you can expect to find in your franchise agreement.

Please note it is extremely important for you to take the time to fully analyze and review any franchise agreement before you sign it. While the following information serves as a general overview, as always, you should also seek your own legal advice when reviewing a franchise agreement. Only then can you obtain specific information and recommendations relevant to your particular circumstances.

Franchise locations
Typically, franchisors are willing to provide some level of territorial protection, whereby they will not allow the ‘cannibalization’ of your franchise business by placing other corporate or franchised stores too close to your location. (This assumes there is a physical location at all, of course. In the case of service businesses without storefronts, for example, the protected territory will instead reflect where you are allowed to draw upon customers.)

A franchisee will normally ask for a certain radius of territorial protection around his/her physical location, which may be expressed in terms of municipal boundaries, postal codes, street names or an actual measured radius. The franchisor will then agree not to establish any other franchises or corporate-owned stores in the defined area.

Most franchisees will want the geographic restriction to be as large as possible, under the assumption this will generate the largest population base of potential customers for their location. This is not always the case, however. Often, a higher density and concentration of franchises in a given area will lead to greater public recognition of the brand and higher demand for the franchise system’s products and service. So, it can be beneficial to have stores located closer together.

On the other hand, if a franchisee runs the system’s only location within a large city, brand recognition may be too low to register with enough consumers. A single pizza shop in the middle of Toronto, for example, will likely struggle to gain attention; but if the same franchise system quickly set up 20 locations across the Greater Toronto Area (GTA), the brand would generate greater awareness, which would likely be of benefit to all 20 locations.

snell1Proximity policies
With the aforementioned factors in mind, some franchisors are becoming more hesitant to grant large geographically restricted areas to their franchisees. Instead, they are developing ‘proximity policies,’ which attempt to balance the need to provide franchisees with a strong demographic base with the aforementioned need to build greater brand recognition across the region.

Typically, newer franchise systems will grant larger areas of exclusivity to franchisees, while more mature systems will grant smaller areas—or even no exclusivity or protected territory at all.

Franchisors need to think about exclusivity provisions not just horizontally, but also vertically. In a big city, it is not uncommon to see coffee shop franchises set up in very close geographic proximity to each other, but serving very different customer bases, since the local populations are more aligned with office towers than with street layouts.

As the potential franchisee, it is important for you to ask the franchisor about its policies regarding how close its franchises may be located to one another, before you make the decision to buy a franchise. It is also important to learn about the franchisor’s plans for expansion near your intended location.

Generally speaking, the franchisor needs to balance the expansion of the brand with the protection of the local franchisee. This is not an easy balancing act, however, and many franchisees have trouble seeing the development of additional franchise locations close to their own territory as being a positive development.

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