What is exclusive territory?

If you buy a franchise with territorial exclusivity this means you as the franchisee will have an agreed protection from the franchisor against further competition in your designated area of operation. This only protects you against franchise operations within the same company and not against outside competition.

How does it work?

If agreed upon in your franchise agreement, there will be a section defining the provision for exclusive territory. The grant of an exclusive territory generally restricts the franchisor from placing another franchise within a defined territory. It doesn’t however, give the franchisee the automatic right to open another franchise unit within the territory. It also doesn’t give the franchisee exclusive rights to the customers within the territory. A franchisor cannot prevent a franchisee in one territory conducting business with customers located within the territory of another franchisee.

Why is exclusive territory important in franchise agreements?

Exclusive territory is the kind of guarantee and reassurance many franchise investors need to be sure they are in control of their market area. No business owner wants to see their profits syphoned into the same company down the road - otherwise, what would be the market benefit of investing into the franchise in the first place? The idea of territorial exclusivity ensures a fair market for each franchisee to operate within. It also aims to eliminate unnecessary conflict between rival owners which can lead to downward spirals such as price wars, impacting the brand as a whole.

It can be destructive if there are too many franchise units in one area. On the other hand, if there are too few it can impact a businesses cohesion. Getting the right balance of franchise units for the right market is important for a franchise brand to thrive.

Limitations

Always check your franchise agreement to know your exact terms and conditions surrounding exclusive territory. Although you have been granted exclusive territory, it may come with legal limitations.

• Franchise agreements often contain a clause for the franchisor to withdraw territory exclusivity or alter the boundaries of the territory if the franchisee fails to hit the required performance targets, or if they breach their franchise agreement. This protects the franchisor against an under-performing franchisee who fails to have the right skills to reach their market potential.  
   
• If there has been a change to demographics within the franchise territory, such as an increase in the population or a substantial demand for the product or services, the franchisor may reserve the right to intervene, altering the boundaries of the territories.
   
• Exclusive territorial restrictions may also be subject to European Union or local competition laws, which depends on the type of franchise being operated and the market share of the particular franchise. Protected limitations may include targeted advertising (direct mail or email) or visiting customers in another franchisee’s territory. Note that broader advertising methods such as newspapers and social media are deemed fair by competition laws.  

Defining the exclusive territory

There are many ways to define an exclusive territory and it will vary from franchise agreement to franchise agreement. Exclusive territory could be defined as an entire country, right down to a single local shopping centre. Defining the right territory depends on the company’s market research and developmental stage in franchising. For example, a large fast-food franchisor wanting to enter into a new country could grant excusive territory access to a master franchisee, who will use their local knowledge to develop the business – taking resource and investment pressure off the franchisor. On the other hand, a lawn mowing company wanting to expand might only have rights to certain postcodes within a city, as not to interfere with existing franchises.  

Common territory definitions include:

• Location radius.
• Postal rounds.
• Post codes/ Suburbs.
• City limits.
• Regional states.
• Countries/States.
• Shopping centres and districts.
• Naturally occurring boundaries (such as rivers).