Buying a franchise: how to negotiate territorial protection

A promise that you will be the ‘only franchisee in town’ is not enough to protect your investment. The franchisor may retain the right to open its own outlet, sell online or supply major customers in the same area. Before joining a franchise network, clarify what territorial protection covers, who is bound by it and what you can do if the agreement is breached.

1. Distinguish between an approved location and a protected territory

The right to operate at a particular address is not the same as an exclusive right to a particular territory. Your agreement may allow you to open an outlet while leaving the franchisor free to approve a location for another franchisee in the next street.

Ask for the agreement to answer three questions clearly:

• Where may you operate? Is only one address approved, or can you choose a location within the territory?
• What is the franchisor prohibited from doing? Does the protection cover new franchised outlets, the franchisor’s own outlets and operations run by affiliated companies?
• What are the exceptions? Are shopping centres, railway and bus stations, temporary sales points or other special formats excluded from the protection?

Do not settle for just a town or city name, or a phrase such as ‘the wider area’. Agree on a map to be attached to the contract, along with a precise description of the boundaries, using streets or administrative boundaries, for example. Also specify how locations on the boundary will be treated and what happens if administrative boundaries change later.

2. Check the protection across every sales channel

Territorial protection may apply to physical outlets but not to orders placed through a shared website, app or delivery platform. This is often where misunderstandings arise: the customer is in your territory, but someone else receives the revenue.

Work through some specific scenarios with the franchisor. Who handles an online order from a customer on your street? Can a neighbouring outlet deliver into your territory? Who negotiates sales to a local business with branches across Croatia? Can the franchisor offer the same product through other retailers?

For each channel, record who makes the sale, who fulfils the order and whether there is a contractual right to payment for local fulfilment. Do not assume you are entitled to commission simply because the customer’s address falls within your protected territory.

An example for negotiations: if the central system takes an order and your outlet prepares and hands over the product, the agreement should specify payment for that service and responsibility for customer complaints. This is not the same as prohibiting all online sales by other franchisees.

3. Align the protection with Croatian and EU rules

Croatia has no dedicated franchise legislation and no specific mandatory, standardised pre-contractual franchise disclosure document. Territorial exclusivity therefore does not arise automatically when you buy a franchise: its scope must be agreed in the contract.

The Croatian Civil Obligations Act governs contractual obligations and the consequences of breaching them. Sales restrictions must also comply with the Croatian Competition Act and applicable European Union rules. Commission Regulation (EU) 2022/720 is relevant to the assessment of vertical agreements and, subject to certain conditions, provides a block exemption from the prohibition on restrictive agreements.

The distinction between active sales, such as targeted approaches to customers in a particular territory, and passive sales, such as responding to an unsolicited customer enquiry, is particularly important. Restrictions on these forms of selling are not treated in the same way under the law. Nor can online sales simply be banned altogether to protect a territory.

Ask a lawyer to review the specific clause, rather than merely confirm that the agreement contains the word ‘exclusive’. The franchise sector’s self-regulatory standards do not replace the obligation to comply with competition law.

4. Establish when the territory can change

Protection may be conditional on performance targets or network development. Check whether the franchisor can reduce your territory because of turnover, failure to open an additional outlet or an assessment that there is ‘untapped market potential’.

If such conditions apply, ask for objective criteria, a predefined assessment period and a way to verify the data. Distinguish between an obligation you have expressly accepted and an expectation the franchisor has not written into the contract.

Agree on written notice before any change, an opportunity to respond and a procedure for challenging incorrect calculations. If a change requires your consent, make sure the agreement expressly says so. In particular, check whether the protection remains unchanged if you relocate your outlet or renew the agreement.

5. Agree on the consequences of a breach

The agreement should specify whom you must notify of a breach, what evidence you need to provide and how quickly the franchisor must respond. Useful evidence might include the address of a new outlet, published advertisements or a documented offer to a customer.

Negotiate an obligation to remedy the breach and, depending on its severity, the option of a fee reduction, damages or termination. Do not assume these rights will apply to the extent you want; ask a lawyer to check their enforceability and how they interact with your rights under general law. Do not stop making payments without first obtaining legal advice.

Practical takeaway: before signing, prepare a territory map and a list of sales channels. For each channel, note what is protected, which exceptions apply and what happens if the franchisor breaches the agreement.