TL;DR
What is an exclusive franchise territory : Franchisees in exclusive territories face no competition from other franchisees or the franchisor. How that territory is mapped might vary, but one thing’s consistent; no one else from the same franchise can compete in that territory.
What is a protected franchise territory : A protected territory sets boundaries for franchisees to operate with some protections, such as preventing overlapping locations, but doesn’t guarantee exclusivity. Think of a protected franchise territory as an exclusive territory with exceptions.
The article details some of the most common exceptions found in protected territories.
Which type of franchise territory best suits your business ?
Protected territories are more common than exclusive ones, as they offer more rights to franchisors and reduce risks with underperforming franchisees. While they limit some protections for franchisees, they protect the overall franchise. Exclusive territories might be faster to implement, especially for smaller or newer franchises.
Properly defined franchise territories are a key part of any franchise agreement. How this is done can vary dramatically between franchises, which means that franchisors have a lot of flexibility. But that can be an issue if you’re not fully aware of your options. An important option for franchise territories? Choosing between exclusive and protected territories.
Let’s examine each one and break down the differences.
What is an exclusive franchise territory?
In short, franchisees operating in exclusive territories won’t compete with any other franchisees or the franchisor in any way. How that territory is mapped might vary, from using isochrone or isodistance maps to a segment of an overall market, but one thing’s consistent; no one else from the same franchise can compete in that territory. That includes setting up a physical location and other distribution channels, like selling products online.
Exclusive territories for fixed vs. mobile businesses
In practice, an exclusive territory can be somewhat different based on whether your franchise is a fixed business where customers come to you (e.g. a retail store, a beauty salon) or a mobile business where you go to your customers (e.g. a plumbing service, a moving company.)
- For fixed businesses, an exclusive territory means no other entity within the franchise, whether franchisee or franchisor, can sell products or services to the customers in a defined territory — even if their business is outside that territory.
- For mobile businesses, your franchisees will get a territory within which only they can service customers. That means no other franchisee can come within its boundaries. Depending on your franchise agreement, if another franchisee were contacted by a customer in that territory, they may have to redirect that contact to that territory’s owner.
What is a protected franchise territory?
A protected territory defines the borders within which franchisees can operate, without any guarantees of exclusivity. But that territory will have some protections — like preventing two franchisees from opening a business in the same area.
While exclusive territories are generally consistent across franchise agreements, the actual protections offered with a protected territory can vary. Think of a protected franchise territory as an exclusive territory with exceptions.
This is where you can tailor your franchise to benefit your overall business while keeping it attractive to potential franchisees.
What are common exceptions you’ll find in protected territories?
Before you start drafting up your franchise agreement, consider some of the most common exceptions you’ll find in protected territories:
- Alternative distribution models: While most franchise territories will be mapped to prevent franchisees from cannibalizing each others’ territories, this may not apply to all distribution models. For instance, a protected territory could prevent two franchisees from setting up shop a block away from each other, but wouldn’t prevent them from selling to customers in the same territory through an online store.
- Captive markets: This refers to specific locations that draw crowds within a territory, like stadiums, malls, and airports. Many franchise agreements have exclusions for these, meaning another franchisee might serve customers in a mall that’s within another franchisee’s territory.
- National accounts: This exception gives franchisors the ability to serve facilities or businesses that are part of a national-scale corporation, even if those locations are physically within your territory. For example, a hardware store franchise might have an exclusive deal to supply specific retail stores within a franchisee’s territory.
- Performance quotas: Some franchise agreements only protect territories if franchisees can meet specific sales or revenue quotas. If they don’t, the franchisor or another franchisee may be allowed to operate in that territory.
- Private label: Under this exception, a franchisor may sell a product or service that competes with the franchise as long as it’s under a different trademark or brand name.
Which kind of territory is best?
Generally speaking, protected territories are much more common than exclusive ones, especially with larger franchises. That’s because protected territories generally benefit the franchisor more than the franchisee. After all, protected territories essentially take away certain protections a franchisee would enjoy with an exclusive territory, usually for the good of the overall franchise.
As a franchisor, a protected territory will give you more rights and lower the risks associated with bringing on a franchisee who ends up underperforming. That said, getting the balance between protections and exceptions just right involves a lot of time with lawyers and business strategists. So going for exclusive territories may be a way to expedite the process, especially if you’re running a smaller, younger franchise.
4 steps for mapping franchise territories
Now that you know which type of franchise territory best suits your business, let’s quickly cover the four steps to follow for mapping them. You can do this with a franchisee to show them your process, but it’s usually best to do a bit of prep work beforehand.
Step 1: Pick a location for reference and analyze it
Whether you have multiple locations or a single one, you need a point of reference to start identifying and systemizing success for your burgeoning franchise. If you have multiple locations, be careful not to just pick your best or worst performer — pick one that represents average performance.
You’ll want to analyze the location’s target demographic, its catchment area, its revenue, and even its logistics and overall business strategy. These will be reference points you can use to map out future territories and evaluate their chances of success.
Step 2: Identify your key success factors
Now that you have a better understanding of what an average location in your business looks like, you can start identifying the success factors a franchise territory will need to guarantee success. Some examples include:
- Specific points of interest, like complementary businesses or other landmarks.
- Transportation infrastructure, like highways or nearby public transit.
- Demographic characteristics, like specific income levels or ages.
Step 3: Spot territories that align with your criteria
With your key success factors identified, it’s time to do some research. Start identifying cities and neighborhoods you want to expand into, map out territories, and test them out. You can do this manually, of course, but a location intelligence tool like Smappen will make things much smoother.
Smappen lets you automatically map territories based on distances, drive times, and other factors. You can also use demographic data to research potential markets and ensure that important POIs are present in them. Imagine if you had to do this all manually.
Try Smappen for free and you’ll see the difference.
Step 4: Transform territories into zip codes and add them to your FDD
Your FDD (or franchise disclosure document) is a legal document that’s essential to defining and selling franchise opportunities. While having a catchment area defined with drive times might work well with your business strategy, that isn’t good enough for an FDD. Make sure to turn your territories into zip codes that can be listed in this document.
In Smappen, you can create your territories using zip codes in just a few clicks by using the “Territory” mode. This will allow you to visualize territories with your future franchisee as well as associated data, like potential clientele and competition. You can then extract the list of zip codes for your franchise agreement.
Why Insulation Commandos uses Smappen for franchise territory mapping
Insulation Commandos is a home services franchise specializing in insulation. Their work includes full insulation overhauls on older buildings and dealing with specific issues like drafts and improper sealing in newer ones. As a young franchise, one of the organization’s most important tasks is properly defining and mapping franchise territories and selling them to new franchisees.
Dustin Ingle, the CEO & Director of Franchise Development at Insulation Commandos, uses Smappen to map out franchise territories and share them with potential franchisees.
“When I have a call with a potential franchisee, I can show them the map of their city in Smappen and we build the territories out together since the franchisees know the area better than we do. A franchisee in Austin purchased four territories, and we built those four territories with Smappen and put them right in the contract.”
Dustin trusts Smappen as his business’s location intelligence tool because it has robust data, it’s easy to use, and he can even use it on his phone.
Find out how Smappen helps Insulation Commandos grow its franchise.
Get Smappen and see it for yourself
Need to start mapping franchise territories? You can start using Smappen for free right now.
