Franchisees…Let’s Talk Territory!
Being secure in the fact that your territory is protected is a must for a franchisee. Without the territory being fully protected the market is not, which means, bottom line, your revenues may not be what you expect when you first sign the papers and become part of the franchise.
Before signing the Franchise Agreement, you must make sure that your territorial rights are laid out completely. You must also realize that the words exclusive territory rights are not always what they seem to be. Franchise Agreements that do stipulate exclusivity of territory very often do not address the ‘what if’s” that can happen to a franchisee – situations that can severely effect your profits.
Having a franchise attorney on your side who knows how to verify every facet of what “exclusive” really means when it comes to your agreement is a necessity. This attorney will understand that the territory needs to be looked at far more in-depth, and work through all types of situations, such as discovering if the exclusivity applies to a set geographic area with specific borders, such as a square mile limit, or whether the exclusivity of territory being presented to you is allocated by demographics – which means population numbers or the minimum number of households in the area.
Demographics is a whole new ‘bag of tricks’ when it comes to the territory arrangement because, as we all know, life changes on a daily basis. Whether changes arise because of the economy or jobless rates, population numbers can change quickly, as well as the size and structure of the neighborhoods in your territory.
A good example of this is when an increase in population occurs, a franchisor could be entitled to open a competing franchise close to your supposed “exclusive” territory – cutting into your profits in a very big way. Suffice to say, the “what if’s” are necessary to understand before committing your time, effort and ingenuity into opening your own franchise. There are some franchisors who offer the “right of first refusal,” which actually gives the existing franchisee the option to take over the new territory before it’s ever offered to anyone else; this is one of many issues that the franchise attorney can unravel.
There is also the issue of a franchisor being bought out by a competitor in your territory. This, yet again, is a place where you need to have contingency clauses in the Franchise Agreement in order to protect your territory rights in the case of a merger or acquisition. Compensation must exist for the franchisee. Whether that be receiving fees from the new competitor, or being offered a provision in the Franchise Agreement to have the option to buy the competing location at a fair market price – these details need to be shown in black and white.
Mike Rosenthal, Franchise Attorney, is the skilled individual you want on board before signing that Franchise Agreement that locks you into a situation that may not be clearly spelled out – a situation that could end up costing you money instead of providing you with the yield you expect.
There are very basic questions that franchisees forget to ask when heading into a business deal that is both new and exciting. A few examples include: How is the territory actually defined and is it really exclusive? Are you, the franchisee, allowed to choose the territory and then select the location you want within that territory? Does the franchisor have the right to force you to relocate at a later date?
“Exclusive territory rights” and “first refusal rights” are only a couple of hurdles located in the tricky waters of opening a franchise; and any rules and regulations that are not spelled out can jeopardize your franchise later on down the line.
Due diligence is a necessity for your new venture. But with all the work that must be done in other areas, such as marketing, advertising, building a skilled staff, and the day-to-day operations of the franchise, Mike Rosenthal is the one to turn to in order to make sure the legal side of things is taken care of correctly so that you and your investment are secure.
Opening a franchise is a serious commitment and, like the old line states, everything must be in writing! This is your future – make sure it’s protected.
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