Why You Need to Seriously Consider Territories and Exclusivity when Creating a Franchise

Along with earning potential, questions about territory are at the top of mind for franchisee candidates. Territories, after all, help determine earning potential because they contain a franchisee’s would-be customers. But because franchising has become so competitive, with similar brands going after the same customers, franchisees should not have to compete with other franchise owners from their own brand.

Street map with locations pinned

When emerging franchisors are considering establishing territories, they should also think through offering exclusive rights to them. An exclusive territory is a specific protected area where the franchisee can operate his or her business, without competition from franchisees in their own system. This is an attractive incentive for potential franchisees to pursue investing with your brand and will be instrumental in growing their customer base. Here are some other ways offering exclusive territories can benefit both franchisees and franchisors:

Keep the Peace

Exclusive territories can help promote harmony between franchisees and the franchisor. If two or more of the same brand locations are in the same territory, there’s the potential for franchisees to begin competing for the same customers, depending on the business concept. Providing separate and exclusive territories protects their customer base and the annuity revenue stream they create from obtaining and keeping loyal customers.

Group of men and women executives

Plus, without exclusive territories, bad blood can form between competing franchisees. This is not ideal in any situation, but it’s especially challenging for emerging franchisors who are trying to build a strong, reliable network of franchisees. Often, franchisees rely on each other for advice or help when it comes to support and improvement. If there’s animosity between franchisees because they’re competing against each other, that camaraderie and support will not exist.

Besides potentially forming ill will toward each other, franchisees may also look unfavorably upon their franchisor for not providing them with the protection that exclusive territories brings to a system. This will almost certainly come up when franchisee candidates are doing their due diligence by speaking with existing franchisees, and could stall franchise development.

Build a Good Reputation

In an exclusive territory, the franchisee has the opportunity to establish the brand and set it up for success in that area. Exclusive territories for your franchise system also protects your brand in each area.

For example, if you have two franchisees in the same territory, and one provides sub-standard service, doesn’t keep a clean location or is a lousy neighbor in the community, they might sour the reputation of the other franchisee and his or her location. Ultimately, your brand suffers in that whole territory. The effect can be even greater with multiple locations in one territory.

However, before offering exclusive territories to potential franchisees, you will have to create them as fairly and equitable as possible.

How to Develop a Territory

After some thorough planning, you’ll decide where the territories will be located. Franchisors typically determine territories based on zip codes, geographic size, population size, natural boundaries or other criteria.

The most common methods of determining a territory are by zip code, radius and population. However, these methods are not all created equal and may be advantageous to some and a disadvantage to others depending on where they operate.

Back of woman’s head looking at white board with graphical flow chart

For example, a zip code-based territory is typically made up of a cluster of zip codes. That’s great for metropolitan areas, where the populations are dense, but that type of territory does not always work well for rural areas where the population is usually small and spread out. A similar argument can be made for the territory based on radius, or physical distance. Basing a territories on population, where each one has the same number of people/potential customers, may seem fair. However, the demographics of each territory may be different, with some not a fit for the franchise brand.

Determining territories often includes some combination of metrics to make it as fair as possible. Regardless of criteria, all territories should have growth potential for the franchisee. A market research firm can help expand the criteria for growth by studying the performance of your existing territories, and a consultant can conduct a territory optimization analysis.

Retain the Right to Change Status

As franchisor, you can include stipulations for exclusivity when writing the franchise agreement. Consider adding a clause that allows you to change the territory status from exclusive to non-exclusive for a number of reasons, including if demand for the franchise grows in the territory or the number of franchisee prospects increases.

With 30 years of franchising experience and more than 800 franchise owners representing over 1,200 locations for five brands, Winmark Franchise Partners can help emerging franchisors develop the right territories. Contact us here or at (844) 452-4600.

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