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Exclusive versus Non-Exclusive Franchise Territories: A Compromise

by Ed Teixeira

There are situations when franchisors should allow franchisees to conduct business outside of their territory. Learn why the choice between exclusive and non-exclusive territories is not quite as clear cut.

In a number of instances franchisor-franchisee disputes arise because of territory issues. In some cases, a franchisee is granted a territory without any defined criteria. One could consider this situation akin to a franchisee being granted a location territory. In other words, the franchisee is granted the right to open up a franchise in a specific location only. The franchisor could grant a franchise to someone that could open up less than a ¼ mile away or the franchisor may open a corporate location nearby and use their superior resources to literally draw revenues away from the franchisee. Claims of encroachment can then enter the scene. A past article by franchise attorney Michael Einbinder provides a detailed look into the issue of exclusive territories.

There is a school of thought that believes every franchisee should have a true protected territory free from intrusions by other franchisees. However, I take the position that there are situations where a franchisee should be allowed to sell into another franchisee’s territory.

Franchise Concepts Where “Outside Territory Sales” Could be Allowed

The franchisee markets services to other businesses or consumers, whereby the franchise location, unlike a retail business does not host customers.
Typically these services would include repair or construction services for residential and commercial customers or B2B services, for example, business coaching.
Each franchisee is granted a clearly defined territory.
There is a high probability that franchisees may have a relationship with potential customers outside of their territory

Reasons for Allowing a Franchisee to Generate Sales Beyond Their Territory

Enables a franchisee to capitalize on relationships they may have outside of their own territory. This can benefit the entire network by increasing brand visibility.
Allows for highly motivated franchisees to generate additional sales.
Facilitates franchisees collaborating on projects.
Can help generate regional accounts with multiple customers or locations that can extend into other territories. Note: some franchisors may opt to market to and control all accounts with more than one location.

Controlling Franchisee Marketing Activities

Establish a sales quota for each franchisee territory.
Any sales generated outside of a franchisee territory do not apply to sales quota.
Franchisee is not allowed to actively advertise or market into another franchisee territory.
Franchisee sales outside of their territory must be approved by the franchisor.
The franchisor doesn’t market into franchisee territories from company locations or alternative distribution channels.
Can require that the franchisee generating sales from another franchise territory pay a fee to the resident franchisee.

A compelling case can be made for granting franchisees true protected territories with exclusive rights to market and generate sales limited to their individual territory. However, there are instances, whereby allowing franchisees to generate sales from outside of their territory, including another franchisee’s territory, has merit. If proper and reasonable controls are in place it’s possible that allowing franchisees the right to generate sales beyond the boundaries of their territory can benefit the entire network.