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What are the pros and cons of an exclusive trading territory?
If the franchisor grants an exclusive territory, it means it will not allow another franchisee or will not itself operate in that territory. This may be an attractive proposition for a franchisee, who will be free to exploit that territory. However, if it is too small the franchisee may have difficulty expanding their business, given that if the franchisor has granted exclusive territories to other franchisees any expansion of a territory many impinge on the territories of other franchisees in the network.Alternatively, if the exclusive territory is too big and the franchisee is committed to certain minimum sales that reflect its size, the franchisee may have trouble meeting these targets, which could lead to termination of the franchise agreement.From the franchisor’s point of view, while granting an exclusive territory may incentivise a franchisee to maximise sales, the territory will be served by only one franchisee. This means that a franchisor will need to be certain a franchisee granted an exclusive territory has all the credentials to meet and generate customer demand in that territory, as there will be no competition for business from other franchisees. Any failure to meet customer demand may have a negative impact on the reputation of the franchise concept as a whole.
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