When you purchase a franchise, your franchisor must provide you with a Franchise Disclosure Document, called an FDD. The FDD includes disclosures about 23 different subjects related to the franchise. Item 12 of the FDD, the subject of this post, is entitled “Territory.” Though it might sound simple, a franchisee’s rights to their territory has many aspects.
Franchisees generally understand that their territory will be limited to a certain geographic area. Under Item 12, there are two types of territory: exclusive, and non-exclusive. An exclusive territory is when the franchisee is the only entity permitted to sell goods and provide services within the area. A non-exclusive territory is when the franchisor reserves the right to establish a company-owned store or franchise within the territory.
Franchisees should be particularly aware of what sorts of marketing efforts the franchisor is permitted to use. A territory is still considered exclusive even if the franchisor uses direct marketing like the mail, Internet, or catalogs. A franchisor’s attempts to solicit potential clients in a franchisee’s territory have the possibility to negatively affect the franchisee’s bottom line.
Furthermore, the FDD must inform the franchisee about a number of other items related to the territory, including the following:
The minimum territory being granted to the franchisee,
The conditions for relocating the franchise or acquiring new ones,
Whether the territory is exclusive,
Whether the franchisee has a right of first refusal for other territories, and
Any restrictions preventing the franchisor from taking orders in the franchisee’s territory.
It is important for franchisees to know the conditions for purchasing another franchise. Franchisees often become adept at running their franchise and want to use their skills to expand with an additional franchise. Knowing in advance what will be required to do this helps a franchisee to plan for the future.
Another item that franchisees should look into – and this one may sometimes be negotiable – is a right of first refusal on adjacent territories. This is the franchisee’s right to purchase adjacent territories before anyone else. It is much better for a franchisee to own a block of contiguous territories than to be competing with another franchisee for the same business.
Many factors come into play in the Territory section of Item 12 of a Franchise Disclosure Document. Franchisees should carefully review their FDDs – with a licensed North Carolina attorney, when possible.
DYE CULIK PC is a Charlotte, North Carolina business law firm that represents franchisees, entrepreneurs, and other business owners. DYE CULIK PC does not represent franchisors – we always make franchisees’ interests a priority. Contact us at 980-999-3557 if you would like to discuss how we can help your business.