When expanding your business through franchising, one of the key questions that needs to be answered is “how should I define the territory a franchisee will receive?” The answer to this has a lot of both business and legal implications.
The definition of “Territory” is a required disclosure in the FDD (Franchise Disclosure Document – Item 12) and should be clearly defined in the franchise agreement between the Franchisor and Franchisee. Disputes over territory infringements are among the most common lawsuits brought by franchisees against the franchisor.
The question of whether a territory should be defined by population (for example, 100,000 households) or by radius (zip codes or other mapped out area around a location) is crucial to how a franchisor wishes to expand. It is best to have a territory that allows a franchisee the opportunity to fully develop his or her business while still allowing the franchisor opportunities to develop the brand and capitalize on the full potential of an area. A franchisor of fitness centers defines Territory by zip code and has flooded the market with too many centers and centers that are located too close together. In many instances in that system, the franchisees are competing against each other for the same customers. This is not a good situation for either the franchisees or the franchisor and many of the franchisees have closed their doors.
Careful consideration of each aspect of a franchise is critical to the success or failure of a franchise from both the franchisor’s and franchisee’s perspective.