Buying a Franchise: Understand Your Territorial Protection

Buying into a franchise network does not automatically give you exclusive rights to the customers around your premises. Another franchisee, the franchisor’s own online shop or a national sales agreement may serve the same customers. Before committing, you should therefore establish exactly what your territorial protection covers. Here is a practical approach to getting geographical rights and sales channels clearly defined.

1. Clarify exactly what your exclusive rights cover

The words ‘exclusive territory’ may sound reassuring, but they are not enough on their own. Protection might, for example, apply only to the opening of new physical shops under the same name. It may not cover online sales, proactive selling or other brands and business concepts owned by the franchisor.

Ask for a map to be attached to the agreement, supported by precise boundaries defined by postcodes, municipal boundaries or specific addresses. Also agree which description takes precedence if the map and the wording do not match. A phrase such as ‘Aarhus and the surrounding area’ leaves too much room for disagreement.

Then obtain written answers to the following:

• Can the franchisor open its own outlets in the territory?
• Can other franchisees set up shops, collection points or temporary sales outlets there?
• Does the protection cover all the franchise’s products and services?
• Are certain customers or sales channels excluded?
• Can the territory’s boundaries be changed and, if so, according to what criteria?

Also check any requirements relating to minimum sales, staffing or opening additional outlets. If protection depends on meeting such requirements, the measurement methods, deadlines and consequences must be clear. You should be able to establish when a right could lapse and whether you will first have an opportunity to put things right.

2. Map out online sales and shared customers

A geographical territory does not necessarily determine who receives the revenue from a customer ordering online. Work through the customer journey with the franchisor, from the first enquiry to payment and delivery.

Use specific scenarios: a customer in your territory orders through the shared website; a company with a local branch enters into a central framework agreement; a customer buys online but collects or returns the goods at your premises. Who does the work, who issues the invoice and who covers the costs?

Create a simple overview covering four points for each scenario:

• Who receives the order or customer enquiry?
• Who is responsible for serving the customer and making the delivery?
• How are payments and any fees allocated?
• Who handles complaints, returns and customer service?

Also clarify how enquiries from shared telephone numbers, booking systems and campaigns are allocated. Allocation may be based on the customer’s address, distance, capacity or a central decision. None of these arrangements should simply be assumed.

In a well-run franchise network, shared sales channels can benefit everyone. But if you are required to handle local tasks without receiving the sales revenue, payment for that work should be clearly set out. Ask existing franchisees whether the stated allocation arrangements also work in practice.

3. Understand the Danish legal framework

Denmark has no dedicated franchise law. Nor is there a franchise-specific registration scheme or a statutory obligation to provide a prescribed disclosure document before signing. However, general business registration requirements and any relevant licensing requirements still apply.

The franchise agreement is governed by the Danish Contracts Act and general principles of contract law. Among other things, this means that the agreement’s wording plays a major role in determining your rights. You have no automatic, franchise-specific statutory right to a protected territory. However, the absence of specific disclosure rules does not mean that the franchisor is free to provide false or misleading information; general rules on contracts and liability for damages may apply.

Territorial protection must also comply with the Danish Competition Act and, where relevant, EU competition rules. The distinction between active and passive sales is important here. Active sales may include, for example, targeted approaches to customers in a particular territory. Passive sales generally involve responding to unsolicited enquiries from customers.

Certain restrictions on active sales may be permitted under specific conditions, whereas restrictions on passive sales are generally more problematic. Online sales cannot simply be prohibited to secure local exclusivity. The EU Vertical Block Exemption Regulation, Regulation 2022/720, is central to this assessment.

Have an adviser with competition law experience review the clause. The aim is not to secure the broadest possible protection on paper, but clear protection that is also lawful.

4. Turn promises into an agreement you can check

Ask for details of existing outlets, territories already allocated and planned openings that have been approved near your proposed location. Ask specifically about exceptions for places such as shopping centres and transport hubs, as well as national customers. A verbal promise that ‘we won’t open anything nearby’ should be replaced with a specific contractual provision.

Bring together the map, exceptions and customer allocation rules in dated schedules to the agreement. Clarify whether the franchisor can change them through the operations manual or whether changes require a separate agreement. Also establish how you will be notified of new openings and changes to shared sales channels.

Finally, agree a procedure for disputes: who should be contacted, what documentation must be exchanged and how quickly must the matter be dealt with? Ask your adviser to assess your options if the agreed protection is breached.

Practical rule of thumb: Do not sign until you can explain the territory’s boundaries, its exceptions and how online orders are allocated. A map alone does not provide comprehensive territorial protection.