Buying a franchise: how to negotiate territorial exclusivity

When joining a franchise network, the promise of “your own territory” can be a key reason for choosing a brand. On its own, however, it does not guarantee that the franchisor will not open an outlet nearby or start serving the same customers online. Territorial exclusivity only has value when the agreement clearly defines its boundaries, exceptions and the consequences of a breach. Before buying a franchise, check not only the map but also who is allowed to sell in the territory and through which channels.

1. Distinguish between an approved location and genuine exclusivity

Permission to open an outlet at a particular address is not the same as protection for the surrounding territory. Even wording such as “the franchisee operates in Brno” does not establish whether another member of the same network can operate there too.

Ask for the draft agreement to answer three separate questions:

• Where are you allowed to operate? Does this cover only the approved premises, or also deliveries, customer visits and additional sales locations?
• What is the franchisor prohibited from doing? Does it undertake not to open its own outlet, not to grant another franchise, or both?
• What exceptions does it reserve? These might include railway stations, shopping centres, corporate customers, temporary stalls or online sales.

Define the territory in a signed schedule to the agreement, ideally using both a map and a written description. If you use postcodes or administrative boundaries, specify what happens if they change. Avoid vague descriptions such as “the wider city centre” or “the catchment area” unless they are accompanied by an unambiguous definition.

2. Check delivery services, online sales and shared customers

A ban on another physical outlet may be useful, but it may not address the most significant source of competition within the network. Find out where orders come from and who receives the revenue when a customer in your territory buys through another channel.

Request an overview of existing outlets, approved future locations and central sales channels that could serve your territory. If the franchisor is reluctant to disclose sensitive details, suggest a non-disclosure agreement. A general assurance that “members of the network do not compete with one another” is no substitute for specific rules.

Work through some example scenarios with the franchisor:

• A customer in your territory places an order through the central online shop.
• A neighbouring franchisee secures an order for delivery within your area.
• The franchisor signs a nationwide contract with a company whose local branch you are expected to serve.
• An order comes in through a delivery platform.

For each scenario, establish who processes the order, who pays for delivery, who receives the sales revenue and who handles any customer complaint. If you are to receive commission or payment for providing the service, you also need rules for calculation, settlement and verification. Do not assume that you are automatically entitled to a share of every purchase made by a customer living in your territory.

3. Take Czech law and competition rules into account

The Czech Republic has no specific franchising act or mandatory state register of franchises. Nor is there a specific statutory pre-contractual disclosure document with standardised content and a fixed deadline for delivery. This does not mean, however, that negotiations before signing are unregulated.

The main legal framework is the Czech Civil Code, Act No. 89/2012 Coll. A franchise agreement is generally concluded as an agreement not specifically defined by the Code, under Section 1746(2). General rules on fair dealing, pre-contractual disclosure duties and liability also apply. Territorial exclusivity does not arise automatically by law: its scope must be established by agreement.

Also important are Act No. 143/2001 Coll., on the Protection of Competition, and, depending on the circumstances, Article 101 of the Treaty on the Functioning of the European Union. Commission Regulation (EU) 2022/720 on the block exemption for vertical agreements is also relevant when assessing distribution arrangements.

In practice, it is necessary to distinguish between actively targeting customers in another territory and passive sales, such as responding to an unsolicited order. Restrictions on active sales may be permitted under specified conditions; blanket bans on passive sales are often problematic. Nor can online sales simply be confined to local boundaries by contract. Have the proposed arrangements reviewed by a lawyer with experience in competition law.

The European Code of Ethics for Franchising is a self-regulatory standard, not Czech law. Its relevance to a particular relationship depends, for example, on association membership or a contractual commitment to comply with it.

4. Address changes to the territory and breaches of the agreement

Exclusivity may be conditional on achieving a minimum turnover, opening another outlet or meeting operating standards. These conditions must be measurable and predictable. Find out which data will be used to assess performance, when assessments take place and whether you will have a reasonable opportunity to remedy any shortcomings.

Reject any vaguely defined right for the franchisor to reduce your territory at any time “according to the needs of the network”. Negotiate objective grounds for changes, advance notice and a consultation process. Also clarify whether protection lasts for the full term of the agreement and what happens on renewal.

Agree a specific procedure for breaches: written notification, a period to remedy the breach and appropriate contractual remedies. If the agreement includes a contractual penalty, explicitly address how it relates to damages. Under the Civil Code’s general rule, a contractual penalty may exclude damages for the same breach unless the parties agree otherwise.

Practical takeaway: Before signing, prepare a map of the territory and a list of sales scenarios. For each, you need a written answer setting out who may sell, who receives the revenue and how breaches will be dealt with. Only then will you know what protection you are actually buying.