Different Types of Territorial Restrictions in Franchise Agreements

Entrepreneurs considering a franchise opportunity have a wide array of immediate and long-term concerns. For some, brand recognition is most important, while others make their decision based on initial investment costs and anticipated returns. No matter what type of industry you’re looking to enter, you should pay close attention to the territorial rules proposed within the franchise agreement. The type of protection a franchisor offers and the way in which boundaries are defined can determine if an investment is worthwhile or not.

Franchisors are required to provide prospective franchisees with a Franchise Disclosure Document that includes detailed information about territorial rights and restrictions before any agreement is signed. One reason is that territorial provisions vary significantly from one franchise system to another. The most common types of territorial arrangements include the following:

• Exclusive — With an exclusive territory, the franchisee has the sole right to open an outlet within a specific geographic area. The franchise cannot authorize someone else to conduct business or sell to consumers directly throughout that zone.
• Non-exclusive — Some franchisors retain the right to contract with other franchisees regardless of their proximity to existing locations.
• Protected — Similar to an exclusive arrangement, a protected territory guards against competing franchisees, but might allow the franchisor to maintain its own sales channels.
• Developmental — A company might establish a developmental territory for franchisees who commit to opening multiple locations within a defined area over a specified period, with protections based on reaching agreed-upon benchmarks.
• Conditional — Franchisors sometimes require outlets to meet minimum sales thresholds or customer satisfaction metrics or risk the reduction or elimination of their territory.

Boundaries might be drawn by ZIP code, mileage radius around the location, county line or population metric. Vague boundary definitions can trigger disputes between franchisors and franchisees, particularly as businesses expand and markets evolve. An experienced Arizona franchise attorney can review the territorial provisions of any franchise agreement before you sign and ensure that you have a firm understanding of the territory and its specific protections.

The Law Offices of Donald W. Hudspeth P.C. handles a wide range of franchise agreement matters for Arizona clients. To schedule a consultation in our Phoenix office, please call 866-696-2033 or contact us online.