BY BILL BRADLEY, Founder/CEO, America’s Best Franchises
February 5, 2013
In many ways, owning a franchise is similar to owning any business – but with the advantage of a proven product, more support and, perhaps, an established franchise brand. Another exception is that many franchise opportunities offer exclusive or protected territories as part of the Franchise Agreement.
Protecting your location’s territory is an important aspect of being a franchise owner that regular business owners don’t get an opportunity to experience. The best way to do this is to ensure there are clauses written into your Franchise Agreement that give you an assigned and exclusive territory. Owning an exclusive territory will restrict other franchise owners (those of the same franchise brand) from competing with you inside your assigned territory. Some franchises offer an exclusive territory as part of the Agreement while others may leave that open to negotiation.
When should you pursue location protection and when shouldn’t you? It depends solely on the type of franchise and market.
Take a popular coffee franchise for an example. In one small town, there might be six or seven of these franchises, some may be owned by the same franchisee and others not. None of the stores have protected territories written into their contracts– but they also really don’t need it.
Consider the products they are selling: coffee and breakfast foods–people want them easily accessible so they can get that morning cup of joe wherever they are. Customers may stop into different locations as their daily routine takes them into different neighborhoods. Many customers stop in more than once a day at the location nearest their office. It also might be a weekly treat on weekends for a family to have a dozen donuts at the location near home.
Customers likely go to the nearest shop to them, their work, or on their route. They don’t usually have loyalties to one particular shop other than what’s convenient. As long as the area has enough market for coffee shops to sustain all of the stores, every store can be successful. In these cases, being able to get a consistently good cup of coffee at different locations is probably a benefit to all the shops.
Quality real estate comes into play more highly for franchises without territory guarantees. That’s why for many restaurant franchises, it doesn’t matter as much if you have protected territory but rather where your franchise is located in relation to customers.
Franchises like educational or fitness franchises are different. They don’t profit from the spur of the moment desires of customers. Instead, they provide a service that would be in competition with other nearby branches of the same franchise. People planning to invest in this type of franchise should pursue territory protections to maximize profits for the individual store. These types of franchises depend on relationships with customers and on providing a service. The nature of the business, combined with a smaller market, means that these franchises depend more on being the sole franchise than on being in a great location. Customers will search a bit harder for personal services they need from someone they like – probably not for coffee from a particular barista.
There are two sides to the protected territory story. As a franchisor, you want the overall gross sales from all stores to be as high as possible. As a franchisee who might only own one, you want to maximize on your profits at your particular store and want limited competition to dip into your sales figures. For a franchisor that means opening as many stores as possible, whereas for a franchisee it means protecting sales.
Negotiating with full awareness of both these viewpoints will probably be most successful. Either way, it’s worth discussing it with potential franchisors while you’re deciding among your options.
