A franchise territory is a region within which a franchisee has the right to locate his or her franchise unit. You could call it the catchment area for a particular franchise unit’s customers. If the franchise territory is exclusive, only one franchise unit of a given franchise system will be located within it. From a franchisee’s standpoint, this is ideal as it means that there will be no competing franchise units to contend with. From your standpoint as a franchisor, it may or may not be ideal, depending on the nature of your franchise business and other factors.
As a franchisor, you earn most revenue when the franchise units in your franchise system profit. So it is in your best interest to see these units thrive. If you allot each franchise unit a disproportionately large franchise territory, you will have more potential customers than you can serve. Chances are that you will end up losing them to competing businesses. This is not ideal. On the other hand, if you allot each franchise unit a disproportionately small territory, or if you allow more than one franchisee to set up franchise units in one territory, you could easily end up undermining all of the franchise units. They may find themselves competing for a limited number of customers. Sooner or later, at least one of them will go under because it will be impossible to drum up enough sales or profits to continue running.
Facing the Franchise Territory Issue Head On
In order to avoid future disagreements with your franchisees over franchise territory, you must make sure that this issue is addressed in length and in breadth in the franchise documents (i.e. the franchise disclosure document and the franchise agreement). Most importantly the conversations on the subject should take place before any documents are signed or transactions between you and your prospective franchisees completed. Hashing out details of this kind beforehand is the best way to ensure that franchising is as smooth a process as possible.
There are a number of details you should clarify in your conversations with your franchisees about territories. You should indicate to them what the nature of the territories will be (i.e. exclusive, non-exclusive or non-existent). You should also clarify what the process of determining territories will be. If you reserve the right to determine the location of the franchise unit, you should say so. If the franchisee is allowed to give some input into the decision-making process, you should indicate this. You should also be clear about whether you will be imposing conditions such as minimum sales quotas on your franchisees.