Q:How does my territory work?

A:When you decide to get into a franchise, how can you know more about your territory? A protected territory adds a great deal of value to the asset of your franchise business. That territory can help determine how many locations the franchisor intends to open in the area of your business. Here are 5 questions that you can ask your franchisor when evaluating territories.

Q:Is my territory based on population?

A:Your franchisor can answer this with a simple “Yes” or “No”. Populations can help to determine the size of a territory and, based on the concept, it may dictate the type of population you are looking at. For example, a food franchise may look at the general population and have minimum requirements in order to feel that a market is big enough to support its business. As you get into more specialized industries, different population models may be needed to help determine the viability of the business. A business service franchise may need a specific number of businesses within the territory to feel that there are enough to facilitate the growth of the franchise just as a tutoring franchise will require a certain number of children in a community. There are many different examples whereby a minimum population is required to support a business. Asking your franchisor the type of population they are looking for in any specific area will give you a better idea of how specialized the business and its clientele really are.

Q:Is my territory protected by hard street borders?

A:Once you enter into a franchise agreement and have selected a location, the next step is to determine your exact and protected territory. Some franchisors will offer a population-based territory. While this may sound good on the surface, it does pose a long-term problem. The more the population grows, the more likely a franchisor is to add another competing location.

If a territory is protected by hard street borders that are in place for the duration of the franchise agreement, then this is an added, valuable asset to your business. Negotiating the biggest territory possible is in the franchisee’s best interest. However, unreasonable requests can easily turn off a franchisor from conducting business with a franchisee. One way to determine what a reasonable territory is with the franchisor is by asking for examples of how territories were determined for other franchisees. This can help guide franchisees in what to expect when it comes time to determine the territory.

Q:Can the franchisor open up other stores within the territory?

A:There are three possible answers to this question, “Yes”, “No”, and “We give a right of first refusal”.

The franchisors that say “Yes” reserve the right to open additional locations within a franchisor’s territory. This is something that the franchisee needs to identify in the franchise agreement which is where it will state this provision. Franchisors that do open up additional locations within existing territories are not working towards that franchisee’s best interest.

Franchisors that say “No” grant a protected territory to franchisees and that becomes a part of your asset for the duration of your franchise agreement. The protected territory allows you to market within your area without fear of the franchisor opening other locations to compete against you with your own brand. This also increases the resale value of your franchise as your business increases in value along with the goodwill that you benefit from with the protected territory.

Franchisors that say “We give a right of first refusal” can be a double-edged sword. If the franchisor comes across another opportunity to open an additional location within a franchisee’s territory, they will contact the franchisee first to offer them that additional location. If the franchisee decides to proceed with the additional location then they are obligated to open a second location. If a franchisee decides that for whatever reason they are not yet ready or interested in opening a second location, then the franchisor has the right to find another franchisee to partner up with in that second location.

Q:If my franchisor has multiple concepts, can they open up other concepts within my territory?

A:The answer to this is usually “Yes”. Most franchisors that have multiple concepts keep the agreements completely separate between the different brands no matter how similar those concepts may be. A franchisor with 20 different food concepts can open up all 20 concepts within one franchisees territory. A proactive franchisor will offer the option to open those locations to existing franchisees that are compliant and in good-standing with the franchisors system. Franchisors are rarely under any obligation to do this and it would be subject to their goodwill.

Q:Can I open other businesses within my territory?

A:Most franchisors restrict a franchisee’s ability to open additional businesses within close proximity to the franchisee’s business. The reasoning behind this is that the franchisor feels it could be a major distraction to the franchisee’s main interest in the business. The majority of Canadian franchisors encourage franchisees to maintain an owner-operator mentality on first operations. Other Canadian franchisors will be okay with an Investor Operator model which will free up a franchisee to open more than one of the businesses. It can also alleviate time restrictions required by the franchisee.

When looking at franchising opportunities, asking questions to franchisors about territories should help you get started in figuring out whether or not the opportunity makes sense to you and your long-term objectives.

Shawn Saraga

President

Mr. Franchise