Vicarious Liability
Short Definition
Territory: A specified area where the franchisee has the exclusive right to operate, ensuring no other franchisees of the same brand will compete directly within that zone.
Full Definition
A territory is a specific area where a franchisee holds the exclusive right to operate. This ensures that no other franchisees of the same brand can directly compete within that designated zone.
Comprehensive Guide
What Is a Franchise Territory?
A franchise territory delineates the specific area within which a franchisee can establish and run their franchised business. This zone is defined in the franchise agreement, and the protection levels given to a franchisee in this territory can differ based on the franchisor's policies. Such territories can be known by various terms, including “operating territory,” “exclusive area,” and “area of responsibility,” among others.
Understanding and assessing the allocated territory and its protective clauses is crucial for anyone considering purchasing a franchise.
Types of Franchise Territories
- Exclusive Franchise Territory: Here, another franchisee is restricted from opening any other locations within your designated area, ensuring you are the sole representative of that brand in that region.
- Protected Franchise Territory: Franchisees can set up another outlet within the same geographical region. However, this opens up possibilities of encroachment, where another franchise of the same brand might open just adjacent or very close to the original one.
- Open (or Nonexclusive) Territories: Franchises under this category do not offer territorial protection. This means multiple outlets, even those owned by different franchisees or the parent company, might operate close to one another.
Evaluating and Negotiating Your Franchise Territory
When reviewing territory rights, the nature of the franchised business - whether it operates from a fixed location or on a mobile basis - plays a vital role. For instance, for fixed location franchises, one must check if the franchisor promises not to grant franchises within a certain radius of your establishment.
It's also essential to understand whether the territory comes with protection. Some franchisors might grant territories but offer no exclusivity, meaning they can allow another outlet to open nearby.
Additionally, there are often exceptions to territory protections. These might include:
- Captive Markets like stadiums or airports
- Web and Alternative Distribution Models like online sales
- Private Label rights and National Accounts
- Performance-based criteria which might affect your territorial rights
Starting with the Franchise Disclosure Document (FDD), especially the FDD Item 12, can provide a comprehensive understanding of the territorial protections on offer.
Examples of Usage
- "The franchisee was pleased to learn that their territory included the entire downtown district, ensuring no competition from fellow franchisees."
- "Upon reviewing the agreement, it became evident that while they had a large operating territory, there were no clauses preventing encroachments from other franchisees."
- "The franchisor offered an exclusive territory to potential franchisees, boosting the appeal of their franchise offer."
Frequently Asked Questions
How is a franchise territory determined?
A franchise territory's scope and size are typically outlined in the franchise agreement. This area can be determined by various metrics, such as ZIP codes, municipal boundaries, or natural landmarks.
What's the difference between an exclusive and protected territory?
An exclusive territory ensures that no other franchisee can operate within the designated area. In contrast, a protected territory allows franchisees to open another location within the same geographical area, but with potential risks of encroachments.
Do all franchises offer territorial protection?
No, not all franchises provide territorial protection. Some franchisors may prioritize broad distribution over territorial exclusivity.
Can territories be negotiated in a franchise agreement?
Yes, potential franchisees can negotiate territory specifics in their agreement. However, the franchisor's willingness to adjust depends on various factors, including the franchisor's experience and the franchise's nature.