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Defining territorial rights in a franchise agreement

by on General

Opening a franchise is a dream come true for many aspiring entrepreneurs, especially if your hard work – up until now – has mostly helped pad someone else’s bank account. But the potential success of your new venture greatly depends on the terms of your franchise agreement.

You have researched prospective franchises and found a popular product or service that is lacking in your area, and one that hopefully fits your passion. However, before signing the agreement, it is essential to understand whether you will have exclusive territorial rights.

Assessing your territory

The biggest advantage of choosing a franchise is having access to a successful brand with time-tested, proven procedures and practices and marketing support. But your business can suffer if another franchisee or the franchisor encroaches – or starts selling in your territory.

Remember that franchisors make money by adding franchisees. However, most successful brands maintain a balance to meet the demand for their product in a given marketplace. They understand that, in most cases, protected territories help franchisees, which benefits everyone in the long run.

The first place to look to determine whether you have an exclusive or protected area is Item 12 of the Franchise Disclosure Document (FDD). Franchisors must disclose the territory and if they have exclusive territorial rights.

Craft a comprehensive franchise agreement

While the FDD contains crucial information supplied by the franchisor, the territorial rights must be clearly spelled out in the franchise agreement. You can avoid potential headaches by consulting with an experienced franchise law attorney who can spot red flags and understand how to negotiate these complicated contracts.

Depending on your market and the brand, a territory may be defined by population, zip codes, demographics, marketing area, online sales, location, etc. Some franchisors may require specific requirements to maintain that exclusivity, like sales quotas. While some franchisors may be less willing to negotiate these terms, having a lawyer focused on franchise law can help you achieve a result that works for both parties.