3.03 – Protected Areas, Exclusive Areas & Encroachment Policies
Understanding the protections your franchise agreement provides for your site and the surrounding area is crucial. Before signing your franchise agreement, you need to understand the concepts of territorial exclusivity and encroachment.
Carefully examine your franchise agreement. Are you granted a protected territory, an exclusive territory, or no territorial rights at all? If your franchise agreement provides only a site address franchise (meaning your protected territory is no bigger than your store’s four walls), the franchisor could establish or allow other franchisee or company-owned locations nearby that may compete with you. Encroachment can potentially impact your business adversely.
Your franchise agreement might grant you an exclusive or protected area. For example, if your franchisor grants you an exclusive territory stretching one mile around your location, the franchisor is prohibited from allowing another franchisee or company-owned location closer than a mile from your store.
However, encroachment may still occur if another franchisee or company-owned location opens within your protected territory, or if the franchisor sells products in other locations within your territory.
Carefully examine your franchise agreement. Are you granted a protected territory, an exclusive territory, or no territorial rights at all? If your franchise agreement provides only a site address franchise (meaning your protected territory is no bigger than your store’s four walls), the franchisor could establish or allow other franchisee or company-owned locations nearby that may compete with you. Encroachment can potentially impact your business adversely.
Your franchise agreement might grant you an exclusive or protected area. For example, if your franchisor grants you an exclusive territory stretching one mile around your location, the franchisor is prohibited from allowing another franchisee or company-owned location closer than a mile from your store.
However, encroachment may still occur if another franchisee or company-owned location opens within your protected territory, or if the franchisor sells products in other locations within your territory.
With an exclusive territory, encroachment can also occur through internet sales (if customers can buy online the same products you sell) or catalog sales (from catalogs mailed into your market). Additionally, your franchisor’s affiliate might allow others to offer similar products and services in your area under a different business name, depending on what your franchise agreement states about your territorial protection.
Some franchise agreements specify that the franchisor or its affiliate may sell items through other distribution channels (like catalog or online sales) or establish other units under different names and trademarks in direct competition with a franchisee. Never assume you have rights not explicitly provided in the agreement.
Being part of a branded system offers the benefit of not being the sole representative of your brand in the market. If left alone, you may be vulnerable to competitors who have no qualms about opening next to you. Good franchisors aim to create brand recognition in the marketplace, benefiting everyone in the chain.
Know before signing the franchise agreement whether the franchisor can open locations in your market area. Contracts often tell you what the franchisor grants but might not explicitly state what it does not grant, such as no right to exclusivity outside of the site, no right to conduct business online, and no right to prevent the franchisor or another franchisee from operating nearby. What you’re getting is as important as what you’re not getting.
Never rely solely on a franchise salesperson’s statements about the system’s practices regarding locations. Always get important terms in writing in the franchise agreement.
Discovering Whether a Franchisor Has an Encroachment Policy
Some franchisors have an encroachment policy, which, while not a contractual obligation, allows a franchisee to protest a new store’s development. Based on research, which the franchisee typically pays for, the franchisor might reconsider opening a new location close to yours.
A policy is not the same as a contractual obligation and can be changed or eliminated by the franchisor, unlike written obligations in a franchise agreement.
If encroachment appears to cause prolonged and material adverse impact, a franchisor might decide against developing the new location. If the impact is minor or temporary, the franchisor might allow the unit to be developed but might assist the affected franchisee in compensating for lost sales. Some franchisors might simply follow the terms of the affected franchisee’s agreement and allow the new unit to open regardless of the impact.
Before signing the franchise agreement, find out the franchisor’s policies and practices on protected territories and encroachment impact. Read your franchise agreement, speak to other franchisees, and consult your attorney.
Additional Sections to Consider
Evaluating Competitive Impact
- Market Research: Conduct thorough market research to understand potential competitive impacts. This includes studying the demographics, customer preferences, and the presence of competitors in the area.
- Traffic Analysis: Analyze foot and vehicle traffic patterns to ensure your location is accessible and visible to potential customers.
Legal Assistance and Advice
- Consult an Attorney: Before signing any franchise agreement, consult with an attorney who specializes in franchise law. They can help you understand the fine print and negotiate terms that protect your interests.
- Ongoing Legal Support: Consider maintaining ongoing legal support to address any issues that arise during the operation of your franchise.
Strategic Planning for Growth
- Long-term Goals: Define your long-term business goals and ensure your location and territorial protections align with these goals.
- Expansion Opportunities: Discuss potential expansion opportunities with your franchisor to understand how additional locations might impact your business.
Communication with Franchisor
- Regular Updates: Maintain regular communication with your franchisor to stay informed about any changes in policies or market conditions that might affect your franchise.
- Feedback Mechanism: Establish a feedback mechanism with your franchisor to address any concerns or issues promptly.
By incorporating these additional sections, you can enhance the value of your lesson content, making the course more comprehensive and beneficial for learners.
