Buying a franchise: check the limits of territorial exclusivity

When you join a franchise network, you may assume that your outlet will be able to serve the local area without competition from within the same network. However, simply specifying a territory in the agreement does not guarantee this. Before buying a franchise, establish what territorial protection covers, whom it binds and how online sales and the network’s growth could affect it. A vague promise of a protected territory can materially change the basis of your investment.

1. Distinguish between territory, premises and exclusivity

The territory specified in the agreement may simply define the area in which you are allowed to operate. A clause relating to premises, meanwhile, may limit your rights to a single address. Neither necessarily prevents the franchisor from opening its own outlet or approving another franchisee nearby.

The wording of the agreement determines the scope of exclusivity. Look for an explicit description of what the franchisor undertakes not to do. Is it prohibited from opening new outlets in the territory, granting rights there to other franchisees, or also selling certain services there directly?

Ask for a map and a written definition of the territory to be attached to the agreement. A municipal boundary, postcode area and radius of a specified distance can produce very different results. Also agree which takes precedence if the map and written description conflict.

Check at least the following:

• Which products and services does exclusivity cover?
• Does the restriction bind only the party you are contracting with, or does the commitment also cover other sales arrangements it operates within the network?
• Are there existing rights, reservations or outlets in the territory that fall outside the protection?
• Can you relocate your outlet within the territory, and what approval process applies?

2. Identify online sales and other exceptions

Territorial protection may look strong even when a substantial proportion of sales is excluded. Common issues to investigate include the network’s online shop, app orders, home deliveries, mobile services and national business accounts. Do not assume that the customer’s address determines which franchisee gets the sale.

Ask the franchisor to set out a few practical scenarios in writing. For example, who handles an order placed through the network’s website by a customer living in your territory? Can another franchisee deliver a service in your area? Can the network open a temporary sales outlet in a shopping centre even if a new permanent outlet would be prohibited?

Distinguish between two things here: the right to sell and the obligation to serve customers. If you must serve customers acquired through the network’s online channels, establish whether this counts towards your own sales or is work for which you receive a separate payment. Territorial protection is worth less if sales from the area are allocated elsewhere while you are left to provide the service.

Set out exceptions clearly. The phrase “the network’s other sales channels” leaves considerable room for interpretation if new channels can be introduced later without more specific limits. Also ask how customer enquiries and requests for quotations are allocated among franchisees.

3. Understand the limits imposed by Finnish law

Finland has no dedicated franchising legislation, statutory franchise disclosure document or specific registration system for franchise agreements. Territorial exclusivity therefore does not arise automatically when you join a franchise network. Its scope must be agreed, although freedom of contract is subject to general legislation.

Key legislation includes the Contracts Act, the Unfair Business Practices Act and the Competition Act. Under the Contracts Act, an unreasonable contract term may be adjusted in certain circumstances. However, you should not rely on this as a safeguard when buying: it is better to clarify the territory’s boundaries before committing.

EU competition rules, including the Vertical Block Exemption Regulation (EU) 2022/720, are also relevant when assessing territorial and customer restrictions. Active selling into a particular territory and passive selling in response to unsolicited customer enquiries are treated differently. Not all sales outside a territory can be freely prohibited, and online selling does not automatically count as active selling.

The Finnish Franchising Association’s Code of Ethics is industry self-regulation, not law. Association members commit to following it, but membership does not itself guarantee any particular form of territorial protection. Have a lawyer with competition law expertise assess significant sales restrictions: the broadest possible prohibition sought by a buyer may not be lawful.

4. Agree in advance how the territory can be changed

A territory that looks suitable when you buy may change as the network grows. Find out whether the franchisor can reduce the territory, alter its boundaries or remove exclusivity during the agreement’s term. Pay particular attention to clauses that allow changes on the grounds of network development or market conditions without specifying more precise criteria.

If protection is conditional, ask for measurable conditions and a clear procedure. Who determines that a condition has not been met, how is the franchisee notified, and can they remedy the situation before losing the right? Also establish whether protection is restored once the issue has been resolved.

Safeguards to negotiate might include advance notice, a joint assessment of the impact and a requirement for written agreement on material changes to the territory. If the network offers you priority rights to open a new outlet, clarify what the offer includes and how long you have to respond. A priority right is not the same as a prohibition on opening a competing outlet.

5. Test the value of territorial protection before deciding to buy

Run a simple scenario test: how would your business be affected if the network opened an outlet close to your territorial boundary or increased online sales in your area? Assess the importance of customer traffic, deliveries and local business accounts. An administrative boundary may not reflect the actual area from which customers are drawn.

Finally, summarise the territory’s boundaries, the scope of protection, exceptions and the procedure for changes on a single page. Ask the franchisor to confirm which clause of the agreement covers each point. If the answer appears only in a sales presentation or meeting notes, insist that it is included in the agreement.

Practical reminder: do not buy on the strength of a promise of your own territory alone. Confirm in writing which forms of competition the protection shields you from, what it excludes and on what terms it can be changed.