Buying a Franchise: How to Negotiate Territorial Exclusivity

The promise that “you’ll be the only one in town” can be a deciding factor when choosing a franchise. Without precise contractual terms, however, it does not tell you whether the franchisor may open its own outlet next door, who will fulfil online orders, or whether your protection will lapse if you miss a sales target. Clear territorial rules help prevent disputes within a franchise network. Before signing, check not only the boundaries of your territory but also what the promised exclusivity actually covers.

1. Distinguish between an allocated territory and genuine protection

An outlet’s address, its permitted delivery area and an exclusive territory are not the same thing. A contract may allow you to operate in a particular town without preventing the franchisor from bringing in another partner. The term “catchment area” alone may not confer any exclusive rights either.

Ask for answers to four questions:

• Who is bound: only the franchisor, or does it also undertake to ensure that other franchisees and affiliated companies follow the same rule?
• What is restricted: opening a physical outlet, actively targeting customers, making deliveries, or another specific activity?
• Where does the protection apply: is it defined by a map, a list of municipalities, postcodes or another unambiguous description?
• How long does it last: for the full term of the agreement, or only for an initial period?

A map attached to the agreement, accompanied by a written description, is usually the clearest approach. Specify which takes precedence if they conflict. If protection is based on a radius around the outlet, explain how the distance is measured. Wording such as “the area around the branch” is too vague to support an investment decision.

2. Check exceptions for other sales channels

Exclusivity for a physical outlet may not cover sales through the central online shop, marketplaces, delivery platforms or sales representatives. The franchisor may also reserve corporate customers, railway stations, shopping centres or temporary stalls. Such an exception is not necessarily unacceptable, but you need to understand its impact before buying.

Request a list of existing outlets and known plans for further openings in the area concerned. Ask about rights already promised to other prospective franchisees as well. Written confirmation from the franchisor of existing commitments is more useful than a verbal assurance that “nothing is planned nearby at the moment”.

Work through specific scenarios together. A customer in your territory places an order on the central website: who receives the order, who fulfils it and who gets the revenue? A neighbouring franchisee launches advertising targeting your town: what happens next? The franchisor opens a collection point with no retail space: does the restriction on new branches apply to it?

If you are to receive a share of central orders, this must be agreed. The contract should specify how orders are allocated, how returns are accounted for and how you can check the calculation. Territorial exclusivity alone does not automatically entitle you to such a payment.

3. Have compliance with competition law checked

The Czech Republic has no specific franchise legislation. A franchise agreement is generally an innominate contract under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. The law therefore does not automatically guarantee you an exclusive territory. What matters is the contractual agreement, within the limits of general law.

There is also no special registration requirement for franchise agreements or mandatory standardised franchise disclosure document. General pre-contractual disclosure duties do apply, however. The European Code of Ethics for Franchising is a self-regulatory code, not Czech law; whether it is binding in a particular relationship needs to be checked.

Territorial restrictions are also subject to Act No. 143/2001 Coll., on the Protection of Competition, and, depending on the circumstances, EU competition law. Commission Regulation (EU) 2022/720 is relevant to the assessment of vertical agreements. It does not, however, automatically approve every territorial clause.

The distinction between active and passive sales is important. Actively targeting customers in another territory is different from fulfilling an unsolicited order. Restrictions on passive sales are generally much more problematic; the specific rules depend on the distribution arrangements and applicable exceptions. Do not, therefore, accept a promise of an absolute ban on all sales by other partners to customers in your town without specialist review.

4. Agree rules for changes and breaches

Protection may be conditional on achieving a turnover target, maintaining opening hours or serving a particular area. If you accept such a condition, it must be measurable. Clarify the assessment period, the source of the data and how orders retained by head office will be treated.

Negotiate a requirement for written notice if you fail to meet a condition, along with a reasonable period to remedy the failure before exclusivity is withdrawn. Check that the franchisor cannot unilaterally change the boundaries simply by updating a map or internal rules. Any substantial change to the protected territory should follow a procedure agreed in advance.

Also consider the reverse situation: the franchisor grants rights to another branch in breach of the agreement. The documentation should address notification of the breach, remedial action and any contractual consequences. Discuss a contractual penalty, fee adjustments or a right to terminate for a serious breach with a lawyer; these provisions need to be coordinated with one another and with any right to damages.

Practical takeaway: Before signing, you need a map, a precise definition of the protection, a list of exceptions and rules for remedying breaches. Exclusivity has value only when you understand what it protects you against — and what it does not.