Establishing a meaningful protected market should be a high priority for any franchise owner. A sufficient market to earn an attractive living and profit without competition from your own brand is a key consideration for any franchise investment. A protected market is at the very top of the AAFD’s Franchisees Bill of Rights: “The right to equity in the franchised business, including the right to meaningful market protection.”
Franchisors are in a constant struggle to entice new franchisees to their brands while at the same time limiting the size of each territory so that they can recruit as many franchisees as possible. This struggle often changes as a franchisor matures. In the beginning, a franchisor may be willing to give away vast territories in order to recruit their first franchisees. As their reputation grows and it becomes easier to recruit new franchisees, they can afford to offer smaller territories. Problems arise when franchisors start looking to break up existing territories so they can fit more franchisees on ever smaller parcels.
A Growing Problem
Franchisor abuse of sales territories is not a new problem, but at the AAFD we’ve been hearing a rising number of complaints recently. This type of abuse is also generating a growing interest in the formation of AAFD franchisee chapters.
Franchisees have reported to us that when their term of service ends, their franchisor offers them a renewal agreement for a smaller territory. The challenges of this situation are obvious. A franchisee who has been working within a larger territory has likely spent a considerable amount of effort and money to raise awareness of their business throughout the territory. Now all of this effort and investment will go toward the benefit of someone else. A smaller territory also means a smaller pool of customers, which will make it challenging, if not impossible for a franchisee to maintain and grow profits. Finally, the salt in the wound is the fact that the new franchisee who will be operating in what was the original franchisee’s territory may cannibalize business within the original franchisee’s remaining territory. On the other side of the coin, if the franchisee has not fully cultivated and harvested its market, a franchisor should have the ability to improve its market penetration.
In other words, it may be a lose, lose, lose situation all around for the original franchisee as well as for the brand.
Handshake Territory Agreements
This type of franchisor abuse isn’t always so clear cut. In the early days of a franchise, a franchisor might allow a franchisee to sell within a territory that is larger than what is spelled out in the franchise agreement. If a franchisee’s surrounding territories are not claimed, it is in the franchisor’s best financial interest for a franchisee to cover the empty territories.
Problems can occur when a franchisee has been selling within an expanded territory for years and the franchisor is now in a position to sell the unclaimed territories to new franchisees. Does the existing franchisee have the right to the territory after so many years of building relationships and visibility in those areas?
This is a difficult question to answer. If the franchisee has been successfully selling within the expanded territory, then he or she may be able to make a strong argument for keeping the full territory and redefining the franchise agreement. However, if the franchisor feels that the single franchisee simply hasn’t been able to cover the entire territory, then it is likely the franchisor will restrict the franchisee to his or her original territory as outlined in the franchise agreement.
Fighting Franchisor Sales Territory Abuse
This size of a protected territory, or a protected market, is always a matter of contract, which is to say a matter of negotiation. The stronger the franchisee, the greater his or her negotiating leverage. Prospective franchisees are advised to make sure they have adequate market protection in their franchise agreement before they sign. If a franchisor demonstrates a tendency towards cutting sales territories, a franchisee’s best recourse might be to form a franchisee association and attempt to collectively negotiate with the franchisor to stop this behavior.