Franchise territory: what to check before buying

A good location is not enough if the rules on who can sell to the same customers are unclear. Before buying a franchise, you need to understand which territory you can serve and how the wider network will operate within it. In franchising, defining these boundaries helps prevent disputes and assess whether the investment makes sense — without mistaking territorial protection for a revenue guarantee.

1. Understand what the law requires on territory

In Brazil, Law No. 13,966/2019, known as the Franchise Law, requires the franchise disclosure document (Circular de Oferta de Franquia, or COF) to set out the policy on territorial operations. It replaced the former Law No. 8,955/1994, which is still cited in outdated materials.

The COF must state whether there are exclusive or preferential rights over a particular territory and, if so, under what conditions. It must also explain whether the franchisee may sell or provide services outside their area, or export. Rules on territorial competition between company-owned and franchised outlets must also be disclosed.

The law requires transparency, but does not automatically grant exclusivity. Buying a franchise does not, in itself, prevent another outlet of the same brand from opening nearby.

The COF must be provided at least ten days before the contract or preliminary agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. Use this minimum period to compare the sales offer with the documents, rather than treating it as a countdown to a decision.

Failure to observe this advance disclosure period may provide grounds to seek annulment or a declaration that the agreement is void, as applicable, and repayment of the amounts specified by law. Omitting mandatory information or providing false information may also lead to these consequences. The legal assessment depends on the circumstances of each case.

2. Turn the promise of protection into a map you can check

Ask for the proposed territory to be marked on a map attached to the contract, with boundaries that can be verified. Expressions such as “central area” or “near the shop” leave room for different interpretations.

Check whether the boundaries are defined by neighbourhoods, municipalities, postcode ranges (known as CEPs in Brazil), streets or a radius from an address. If a radius is used, clarify how it will be measured. Also check how shopping centres, airports and other locations that may be exceptions are treated.

Distinguish between three situations:

• Exclusivity: protection against certain forms of operation within the area, subject to the limits set out in the contract.
• Preferential rights: the opportunity to take on an expansion before third parties, under defined procedures and deadlines.
• No protection: other operations under the same brand may serve the same area, subject to the disclosed rules.

If you have preferential rights, ask how you will be notified, how long you will have to respond and what investment will be required. A preferential right that depends on quickly opening another shop may require capital that is not included in your initial budget.

Also check whether protection depends on sales targets, keeping payments up to date or meeting operational standards. Understand how you will be notified of any breach and whether there is a period to put it right before you lose the right.

3. Clarify who handles online sales

A physical shop’s territory does not, on its own, determine how orders placed through an app, an e-commerce website, by telephone or through third-party platforms are allocated. Do not assume that exclusivity over physical premises also covers these channels.

Put specific scenarios to the franchisor and ask for written answers:

• A customer in your neighbourhood buys from the brand’s website: who receives the revenue and who delivers the order?
• Can another outlet advertise to consumers located in your area?
• Are delivery orders allocated according to the customer’s address, distance from the shop or stock availability?
• Are business sales and major accounts handled by the franchisor, or can they be served locally?
• Do exchanges and customer service for online purchases create costs or generate payments for your outlet?

These answers should be consistent with the COF, the contract and any relevant annexes. If orders are allocated through a platform, ask who can change the criteria and how changes will be communicated.

The aim is not to demand that every sales channel belongs to your outlet, but to understand in advance the opportunities and obligations involved in running it.

4. Test the cash-flow impact before signing

Incorporate the territorial rules into your financial analysis. With an accountant’s help, prepare one forecast based on the current set-up and another allowing for greater competition permitted by the contract. Also factor in online revenue that will not go to your outlet and customer service costs it may have to bear.

Speak to franchisees selected from the list in the COF. Ask whether nearby outlets have opened, whether order allocation has changed and whether there have been difficulties resolving overlapping territories. Their experiences can help you frame questions, but are no substitute for the documents.

Ask a lawyer to review the conditions for changing the territory, any exceptions and the mechanisms for resolving disputes. Important promises made during the sales process should be put in writing in a way that is consistent with the contract.

Practical takeaway: before investing, obtain a contractual territory map, clear rules for each sales channel and a financial forecast that reflects the protection actually offered. If any of these elements remain unclear, resolve them before committing.