Franchise agreements: setting clear, workable territorial protection

When turning an existing business into a franchise system, you need to decide where a new partner may operate and what competition from within your own franchise network should be excluded. A colour-coded street map is not enough. Territorial protection requires clearly defined boundaries, explicit provisions on sales channels, and rules that are commercially viable and comply with competition law.

1. Distinguish between premises, territory and territorial protection

These three terms describe different things. The premises are the agreed business location. The contractual territory is the geographical area to which certain rights or obligations apply. Territorial protection, by contrast, is a specific commitment by the franchisor, such as a promise not to open another franchised outlet in that area.

Defining a contractual territory alone therefore does not reliably establish what exclusivity has been agreed. State explicitly what the franchisee is protected against and what falls outside that protection. In particular, clarify:

• May the franchisor open company-owned outlets in the territory?
• May other franchisees operate premises there?
• Are particular customer groups or sales channels excluded?
• What rules apply to existing company-owned outlets?

Existing outlets are particularly important when converting an established business into a franchise system. Record them before allocating the first territory. A clear schedule to the agreement can prevent later disputes over whether the original company-owned business was intended to be an exception.

2. Shape territories around demand and capacity

The size of a territory should not depend solely on how much ground a prospective franchisee asks for. Instead, assess the geographical market an outlet can realistically serve with its planned staffing, opening hours and service capacity.

Draw on your existing business's experience: where do customers come from? How far are they willing to travel? How far do deliveries or on-site services reach? Distinguish observed demand from expectations of growth. A large territory does not guarantee turnover, and the experience of a single outlet cannot simply be applied elsewhere without scrutiny.

Prepare a short planning sheet for each proposed territory, covering:

• geographical boundaries and relevant sources of demand;
• existing company-owned outlets and territories already promised to franchisees;
• assumptions about operating capacity and identifiable gaps in coverage;
• how up to date the data is and any outstanding questions.

The schedule to the agreement could use street lists, precisely identified administrative boundaries or maps with clear boundary lines. Specify which takes precedence if they conflict. If you use postcode areas, also clarify whether subsequent postcode changes will alter the agreed boundary.

3. Factor in online enquiries and existing customers

Customers do not follow territory maps. They order online, look for an outlet near work or commission services for several branches. Territory planning must therefore reflect how customers actually find and use the business.

Set out a clear allocation procedure for enquiries received centrally. Depending on the business model, suitable criteria might include the place where the service is delivered, the delivery address or the customer's preferred outlet. Also explain what happens when capacity is unavailable and who tells the customer that their enquiry is being passed on. Any transfer of personal data must separately comply with data protection law.

Record how the franchisor's existing customers operating across multiple territories will be treated. If these customers are excluded from territorial protection, the scope of that exception must be clear. A blanket reservation covering all customers subsequently labelled ‘key accounts’ offers little certainty for planning.

It is important to distinguish between the internal allocation of central enquiries and restrictions on customer contacts generated independently by franchisees. Allocating operational responsibility does not automatically mean that a franchisee must turn away customers from outside their territory.

4. Observe the legal limits

Germany has no specific franchise act and no special government registration requirement for franchise systems. The general rules of the German Civil Code (Bürgerliches Gesetzbuch, or BGB) apply, including, for standard-form agreements, the provisions on standard terms and conditions in sections 305 onwards. Territorial restrictions are also subject to the German Act against Restraints of Competition and, where applicable, Article 101 of the Treaty on the Functioning of the European Union.

The EU Vertical Block Exemption Regulation, Regulation (EU) 2022/720, can exempt certain distribution agreements from the prohibition on anti-competitive agreements, provided its conditions are met. It does not, however, permit unrestricted territorial protection against competition. A particularly important distinction is between active sales, such as targeted approaches to customers in another territory, and passive sales, which arise from unsolicited customer enquiries. Restrictions on passive sales are generally problematic; any potential exceptions require careful assessment.

Have territorial protection, online sales and customer allocation reviewed together for compliance with competition law. The European Code of Ethics for Franchising also provides guidance, but it is not legislation.

5. Check that promises match the agreement before signing

Contract negotiations themselves give rise to pre-contractual duties of care and disclosure, particularly under sections 311(2) and 241(2) of the BGB. Do not therefore present a territory as unconditionally exclusive if the draft agreement reserves rights for company-owned outlets or central sales channels.

Cross-check the territory map, materials used during discussions and the schedule to the agreement. Document exceptions clearly and maintain a central register of all territorial rights granted. Agree a transparent procedure for subsequent boundary changes rather than relying on a blanket right to make unilateral changes.

Practical rule of thumb: Grant territorial protection only once the boundaries, scope of protection and exceptions are clearly defined. This turns a sales promise into a dependable foundation for your franchise network.