This Land Is My Land: Understanding Territorial Rights in Franchise Agreements

By Gary M. Remer

For franchisors and their prospective franchisees, few aspects of their relationship with each other – and with other franchisees in their system – are as consequential as territorial rights. These provisions in franchise agreements determine the size and extent of a franchisee’s market and whether the competition they face comes solely from other businesses outside of their franchise family or from their cousins within the same franchise family.

Understanding the importance of territorial rights, the various models for those rights, and how each arrangement can impact a franchise’s success is critical when considering buying into a system. Here is what aspiring franchisees need to know about the what, where, and how of the landscape in which they’ll do business.

Territorial Rights Defined

There are two primary aspects to territorial rights in a franchise agreement:

• The defined geographic area in which a franchisee has the right to operate.
• Whether and to what extent that area is protected from competition by other franchisees within the same system. 

Think of your franchise as the capital of a small country whose sphere of influence extends to your country’s borders as established by the franchise agreement. This is the region where you can and should expect to build your customer base without interference or incursions on your territorial sovereignty from fellow franchisees selling the same products or services.

However, territorial rights are rarely absolute, and some arrangements allow for other franchisees to venture across another franchisee’s borders. Whether that will be the case depends on which of these territorial rights are in your agreement: 

• Exclusive territory grants the franchisee sole rights to operate within defined boundaries, preventing the franchisor from establishing additional franchises or company-owned locations in that area. This is the most protective arrangement for franchisees.
• Protected territory offers some safeguards against internal competition, but with limitations. The franchisor might reserve the right to sell products through alternative channels, such as online sales, grocery stores, or other non-franchised outlets within your territory.
• Designated territory is where you’re assigned an area to operate, but the franchisor retains the right to grant additional franchises nearby or open competing locations. This arrangement offers minimal protection for franchisees.

Beyond Borders: Nuances in Territorial Provisions

Obviously, the geographic scope of a franchisee’s territory is the fundamental aspect of a territorial provision. But defining that scope requires careful drafting and scrutiny. Lines on a map may not tell the whole story. A territory can be determined by specific streets, zip codes, and radius measurements, but it can also be based on population parameters and other metrics. Make sure the agreement is explicit as to the extent of your franchise’s domain.

A franchise agreement grants specific, often conditional, rights to franchisees, but it also reserves many rights for the franchisor, including some that intersect with territorial rights. Make sure you know whether the franchisor can operate company-owned locations in your territory or sell through e-commerce platforms, grocery stores, or other distribution channels that compete with your franchise. These reserved rights can significantly dilute the value of your territorial protection.

As noted, many franchisee rights are conditional. Your franchise agreement may include clauses that allow the franchisor to reduce your territory or eliminate exclusivity if you fail to meet specified sales targets or development schedules. These provisions can create pressure to overextend your business or lose your competitive advantage.

Also, watch out for the possibility that your territory may be adjusted over time. Some agreements allow franchisors to redraw territorial boundaries as the system evolves, potentially shrinking your protected area.

Your Success and Your Territory Rights Are Inextricably Linked

The financial implications of territorial rights cannot be overstated. Your territory directly impacts your potential customer base, revenue projections, and ultimately, your return on investment. A well-defined, adequately sized territory in a densely populated area can be the foundation of a thriving, profitable franchise. Conversely, an undersized and underpopulated territory, or one that lacks meaningful protection from internal competition, can severely limit your growth potential.

The best way to ensure that the territorial rights you need and expect from your franchisor align with the language in the final franchise agreement is to work with experienced franchise counsel who can effectively negotiate the most favorable terms and most expansive rights. If you have questions regarding territorial rights or would like to discuss a potential franchise investment generally, please contact Gary Remer at Maddin Hauser.