What do I need to know about franchise territories?

Franchise territories can be one of the most confusing parts of buying a franchise, especially for first-time franchisees who are unsure what rights and protections they are being offered.

Here, we ask UK franchising experts to explain the key questions prospective franchisees ask most – from how you define ‘territories’ to what exclusivity really means.

What is a franchise territory?

A franchise territory is the area within which you are allowed to operate your franchised business. A franchisor may define it by postcodes, maps, local authority boundaries, a radius or another method that clearly sets out where you can actively market and trade.

Some territories are exclusive, some are protected, and some come with no protection at all – meaning other franchisees and the franchisor can compete directly with you.

John Pratt, senior partner at Hamilton Pratt, advises that when it comes to franchise territories, it’s important to clarify even small details, such as “whether it is the postcodes at the date of the agreement or as subsequently amended”.

Brian Duckett, former chairman of The Franchising Centre, says franchisors typically size territories based on how many potential customers a viable business needs. “Once the business has worked out how many potential customers you need to meet targets [...] it’s then a question of defining the boundaries.”

Do franchisors have to provide a defined trading territory?

No. Vicky Wilkes, head of legal at Aston Villa Football Club, says franchisors are not obliged to grant a defined territory. However, if none is provided, you could find yourself in competition with all other franchisees and the franchisor.

Where a franchisor does offer a territory, Wilkes stresses the importance of clarity. Check that it is large enough to be viable and determine what type of exclusivity the franchisor is granting. “Does it mean the territory is granted to the exclusion of other franchisees or other franchisees and the franchisor?”

Do franchisors ever award more than one territory?

Often they do – but not immediately. Pratt says approaches vary by brand. “Burger King, for instance, is principally looking for franchisees who are able to open a significant number of outlets” whereas “McDonald’s takes a much more cautious view”.

Some franchisors only award additional areas once a franchisee has proven their capability. Pratt warns that taking on too much too soon is risky: “It is quite possible for a franchisee to overextend themselves.”

Shelley Nadler, legal director at Bird & Bird, adds that multi-unit franchising is especially common in sectors like restaurants, where operating more outlets “brings economies of scale”.

How common are protected franchise territories?

Pratt says about three-quarters of franchises offer some form of protection, and just 60% offer exclusivity. He notes a difference between:

● Sole rights – you are the only franchisee in the area, but the franchisor may still operate there.

● Exclusive rights – even the franchisor cannot operate in your area.

Even when a franchisor grants exclusivity, it’s not absolute. While you cannot target customers outside of your area, Pratt explains that competition law means franchisors cannot prevent franchisees from responding to “unsolicited inquiries from a customer outside that franchisee’s territory.”

So even so-called “exclusive” territories come with limitations.

How do franchisors protect exclusive territories?

According to Louise Harris, franchise director of Wilkins Chimney Sweep, franchisors must ensure that exclusive territories are protected from “intrusion by another franchisee”.

Good franchisors monitor activity and, if necessary, issue “cease and desist notices and finally legal action”.

Can I expand my territory?

Sometimes. Pratt notes that while many agreements allocate a territory, many do not. Where a territory is defined, franchisees are generally prevented from actively seeking customers outside it. However, some franchisors allow franchisees to operate in neighbouring unassigned areas until another franchisee buys them.

Do exclusive territories cost more?

Not necessarily. Harris says exclusivity “doesn’t necessarily attract a premium”, but it does come with expectations.

A franchisor will typically include a “full effort” clause to ensure you properly develop the area. If you don’t, the franchisor may “remove all or part of the territory”.

Should I pay a deposit to secure a franchise territory?

It’s common for franchisors to ask for one. Wilkes says this can be appropriate, but only if documented correctly.

She advises getting written confirmation that:

● the deposit is refundable

● it counts towards the initial fee

● the territory is secured for a set period

● you have exclusivity during that time

Do I need to pay for a viability study of my territory?

Wilkes says franchisors are not obliged to do these studies, and franchisees rarely pay directly. Costs are sometimes built into the initial fee.

In unusual cases – such as when a prospective franchisee suggests an untested area – a franchisor might require the franchisee to fund it.

Regardless, Wilkes emphasises: “It is a very good idea for a potential franchisee to conduct their own viability study.”

Do I need to live within my trading territory?

It depends on the franchise model. Harris says that for store-based businesses, living in-territory may not matter. But for owner-operator franchises, “it may be essential”.

Even when it isn’t required, being local can help: “Your personal networks may give you a boost at the start of your business.”

Final thoughts

Franchise territories vary widely between brands, and even “exclusivity” is rarely absolute. The safest approach is to:

● read the franchise agreement carefully

● clarify the exact type of protection/p>

● understand what active and passive selling rules apply

● seek independent legal advice before signing up to your chosen franchise opportunity