Friday, 23 December 2016

Franchise Territory Selection and Business Location

Stone Wall | Boundary | Wall | Territory

Territory selection has a direct impact on the viability of a franchised business and the Franchise System.

Identifying the Territory

Use of a geographic plan which shows territory area or use of postcodes are common ways to identify a territory. Although this may not necessarily be the best approach.

Too large a territory may result in the territory being under-serviced.

Too small a territory may cause the franchised business to become unviable.

Statistical data including demographics; market surveys; and consultants experienced in this field should be utilised to assist with territory selection (as opposed to just selecting an area on say postcodes alone).

Exclusive or non-exclusive territories

A.    Exclusive

Exclusivity implies the Franchisee being given total control of the territory to the exclusion of other franchisees and the Franchisor.

It can happen with newer franchise systems, however, that the first batch of franchisees are given territories that are just too large for them. This potentially causes issues because the Franchisee is either unwilling or unable to develop the customer base within that territory, perhaps because the Franchisee is satisfied with the customer base it has already achieved.

This can then impact on market penetration of the Franchisor’s brand, product or service. 

Franchisor’s maybe able to counter this by setting minimum performance criteria (eg. minimum sales quotes) or set minimum royalty amounts.

B.    Non-Exclusive

As a general rule, the Franchisor has no restriction on granting other franchisees or itself an opportunity to operate a franchised business within a non-exclusive territory.

The difficulty with a non-exclusive territory is how to manage encroachment and cannibalisation within that particular territory.

Exclusivity may not in all circumstances eliminate encroachment either, especially if some franchisees within a system flout the provisions of their Franchise Agreements by seeking customers from within another franchisee’s territory. They may get away with this for a time until the Franchisor or affected Franchisee become aware of the encroachment.

Franchise Agreements do sometimes include provisions allowing the Franchisor to alter the territory, eg. to allow for population growth within the territory.

Generally there will be no restriction on other franchisees or the Franchisor operating within a non-exclusive territory.

Even where the territory is exclusive, there may still be provisions in the Franchise Agreement allowing other franchisees or the Franchisor to operate within the territory. Eg:


  • Where the Franchisee has breached the Franchise Agreement;
  • The Nominated Representative or Franchisee has become sick and unable to carry out its obligations;
  • The Franchisor is permitted to sell its products/services on line;
  • The Franchisee is not meeting certain performance criteria.
Can the Franchisor alter the size of the territory

Franchise Agreements do sometimes include provisions allowing the Franchisor to alter the territory, eg. to allow for population growth within the territory.

Introduction of other Franchisees or the Franchisor into the territory
Generally, there will be no restriction on other franchisees or the Franchisor operating within a non-exclusive territory.

Even where the territory is exclusive, there may still be provisions in the Franchise Agreement allowing other Franchisees or the Franchisor to operate within the territory. Eg: 
  • Where the Franchisee has breached the Franchise Agreement; 
  • The Nominated Representative or Franchisee has become sick and unable to carry out its obligations;
  • The Franchisor is permitted to sell its products/services on line; 
  • The Franchisee is not meeting certain performance criteria. 
Striking a Balance
Whether an exclusive or non – exclusive territory strategy is the right one for a particular franchise system will depend on the specific circumstances of that brand.

Ultimately, Franchisors should be seeking to achieve the highest possible market share and gross revenue, while balancing this against assisting individual franchisee units to achieve profitability at a level high enough to sustain their businesses and want to stay in the franchise system.
C.    Location of the Business
For the majority of businesses which do not have a substantial or total online presence, the physical location of the business remains an important element in the success of a business. A business which is poorly located will have a distinct disadvantage compared with its competitors.

Below is a table summarising issues to be considered:


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Disclaimer

The material provided in this document is for general information only and is not to be relied upon as advice. No responsibility is accepted for any loss, damage or injury, financial or otherwise, suffered by any person or organisation acting or relying on this information or anything omitted from it.

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