Franchise territories: set the rules before expanding

Before offering your first franchise, define where each outlet can operate and how it will coexist with the others. A vague promise of a ‘protected area’ can create expectations that conflict with expansion plans. In franchising, clear territorial rules help protect the franchisee’s investment and manage the brand’s growth, without turning a map into a guarantee of turnover.

1. Choose the territorial rights you will offer

Exclusivity, priority rights and operating without territorial protection are not equivalent. Your choice should reflect the business’s ability to serve an area and its expansion strategy, rather than simply making the franchise easier to sell.

Territorial exclusivity provides protection whose scope must be defined: for example, a commitment not to open another outlet of the same format within a specified area. You must clarify whether this protection covers company-owned outlets, other formats and sales channels.

Territorial priority rights do not permanently prevent another outlet from opening. They may give the franchisee the first opportunity to express an interest in a new operation, following a contractual procedure. Define how the franchisee will be notified, the response deadline and the requirements for exercising this right.

No exclusivity also requires clarity. Prospective franchisees need to understand that other operations may open nearby and which rules will govern how they coexist.

Do not use phrases such as ‘reserved city’ in sales presentations if the documents offer only priority rights. The label used for the protection must match the right actually granted.

2. Map out the area using data from your existing operation

Avoid dividing cities solely by population or using a standard radius. Two nearby addresses may serve different customer groups, while two outlets further apart may compete for the same customers through deliveries.

Use your existing operation to identify:

• Which neighbourhoods customers come from and how far they travel.
• The distance within which you can meet service or delivery deadlines.
• Where businesses, homes and other relevant sources of demand are located.
• Which physical barriers make travel difficult.
• How the outlet’s capacity limits its ability to serve the area.

This information helps you develop assumptions, but does not prove that another location will perform in the same way. Compare competition, buying habits and customer characteristics too.

Next, turn the area into a description that can be checked. An annex containing a map, boundaries and criteria for identifying the area reduces uncertainty around expressions such as ‘central district’. If you use neighbourhoods, municipalities or Brazilian postcode (CEP) ranges, specify how changes to these reference points will be handled.

Model the opening of a second outlet next to the first. If the division leaves addresses unserved or creates overlaps without rules to resolve them, revise the boundaries before making the offer.

3. Resolve overlaps between sales channels

Territorial policy should cover more than shop locations. App orders, e-commerce, off-site services and corporate contracts can cross any boundary drawn on a map.

For each channel in use or planned, answer these questions: who can acquire the customer, who receives the order, who fulfils it and how is payment allocated? Distinguish marketing targeted at an area from unsolicited orders received from outside it.

A hypothetical situation illustrates the problem: a customer lives in one franchise’s territory but buys through the brand’s central channel for delivery to their workplace in another territory. Without an agreed criterion, both outlets may expect to fulfil the order. The rule could be based on the delivery address or another factor appropriate to the business model, provided it is clearly defined.

Also clarify how corporate customers with multiple branches and sales made directly by the franchisor will be handled. Reserving certain channels without explaining the consequences can undermine the protection that prospective franchisees believe they are acquiring.

4. Align your territorial policy with the COF and the agreement

In Brazil, Law No. 13,966/2019, the current Franchise Law, repealed Law No. 8,955/1994. Article 2 requires the franchise disclosure document, known as the Circular de Oferta de Franquia (COF), to state whether territorial exclusivity or priority rights apply and on what terms; whether sales, services or exports outside the territory are permitted; and the rules governing territorial competition between company-owned and franchised outlets.

The law does not automatically grant exclusivity. Your commercial decision must therefore be reflected consistently in the COF, the agreement and the territorial annexes. The COF must be written in Portuguese, using clear, objective and accessible language.

If retaining protection is subject to conditions, such as performance targets, describe the metrics, assessment periods and consequences of non-compliance. Avoid vague clauses that allow the area to be redrawn without established criteria. Have the policy legally reviewed before presenting the offer.

Also prepare a register of territories granted and priority rights currently in force. Consult this register before negotiating any new outlet.

In practice: before selling your first franchise, produce a map, a rule for each channel and a precise description of the protection offered. If the same sale could still be allocated to two outlets with no criterion for deciding between them, your territorial policy needs adjusting.