This month’s article for Elite Franchise Magazine kicks off the year with a look at exclusivity in franchise agreements. Most franchise networks offer their franchisees “exclusivity”, but that doesn’t always mean exactly what you think it might. There are almost always some exceptions when either the franchisor, or another franchisee may be allowed to operate in your area.
Exclusivity and Territory
When it comes to choosing a franchise, picking the right network is only half the story. It’s also important to be in the right location and to understand what geographical rights the franchise agreement gives you.
This is one area where the franchise agreement must be read very carefully as things may not be as they first appear. Most franchise agreements give the franchisee “exclusivity” in their local territory. However, exclusivity can mean different things in different agreements and might only apply in certain circumstances.
Most people would assume that exclusive rights mean that the business owner is the only person allowed to operate the business in that area. However, some franchise agreements also allow the franchisor to operate in the area in some, if not all, circumstances.
For example, the franchise agreement may give the franchisee exclusivity provided that certain performance standards are met. The franchisor may have the right to withdraw exclusivity if standards fall or targets are missed. Equally, the franchisor may reserve the right to choose who gets to deal with “house accounts” or national account customers in the franchisee’s territory. That could mean that the franchisor, or another franchisee serves those customers even though they are based in the franchisee’s area.
Some agreements will give the franchisee “sole” rights, which usually means that the franchisor wont appoint any other franchisees in that area, but that the franchisor can continue to operate in the franchisee’s territory.
There is often a grey area if a neighbouring territory is empty for the time being. The franchisee may be allowed to operate in that area temporarily, but could find access to those customers is denied once the territory is sold. Some franchise networks have a formal process in place to deal with this situation that allows the franchisee to be compensated for the customers he has won in the neighbouring area. However, many networks don’t, which could mean that the franchisee is left disappointed when their customer base suddenly shrinks or when he is forced to hand over part of his customer list without compensation. To mitigate this risk, some networks offer franchisees a right of first refusal before the neighbouring territory is sold.
A similar problem can arise where a franchisee receives an unsolicited enquiry from a customer outside his area (for example if the customer finds the franchisee online or by personal recommendation). Some networks will force the franchisee to pass the enquiry on; others have schemes in place that enable the franchisee to receive a commission for the sale; and some allow the franchisee to serve the customer in full without the need to compensate the neighbouring franchisee.
Franchisees should also consider carefully the local geography in their chosen territory. For example, if the business model involves driving between customer appointments, the franchisee will need to consider how long he will spend on the road versus time actually spent with customers. On the face of it, an area with low population density where customers are widely spread may not be ideal for this type of business; however, an area of high population density with serious traffic congestion may be equally unsuitable. In short, a potential franchisee needs to investigate their proposed area thoroughly and be very familiar with local conditions.
Demographics of the local population will also be important. The franchisor ought to be able to give the franchisee a clear idea of who the network’s ideal customer is; but it will be for the franchisee to seek out those ideal customers in his local area. Before committing to the franchise, the potential franchisee should check that the idea client does exist in their proposed territory and in sufficient numbers to enable the business to be successful.
Understanding what’s important
For some networks, location and a shop front is key. A fast food business that depends on high footfall and passing trade will need to be located in a busy area. Depending on whether customers arrive on foot, or drive, a busy shopping centre, or near a housing estate with plenty of car parking may be ideal. Others, don’t need a shop front but do need to be located within easy reach of their customers. And for some businesses, territory may not important at all – the key driver being the personal connections and reputation of the business owner. Ultimately, a potential franchisee should ensure that they understand the business model well enough to know what’s important and then choose a location that reflects that.
Franchisees should also ensure that they fully understand the extent of geographical rights (if any) that are being granted to them, including any circumstances when the boundaries may be moved, or exclusivity withdrawn.