Defining Territorial Exclusivity in a Franchise Agreement

When a business starts franchising, prospective franchisees often seek assurances that no other outlet under the same brand will open nearby. This is a reasonable request, but promises such as “one franchisee per city” can restrict growth far more than the business owner expects. Territorial protection in franchising needs to be framed as a clear, measurable and enforceable right—not merely a selling point.

1. Distinguish the operating territory from exclusive rights

Indonesia specifically regulates franchising through Government Regulation No. 35 of 2024 on Franchising, which replaced Government Regulation No. 42 of 2007. The regulation places franchise activities within an agreement between parties of equal legal standing, governed by Indonesian law. The operating territory is one of the minimum matters a franchise agreement must cover.

However, specifying an operating territory does not, in itself, establish whether the franchisee has exclusive rights. The agreement must distinguish between the area in which the franchisee may operate and the territory in which the franchisor promises not to open another outlet or grant someone else the right to do so.

Before making an offer, choose an arrangement you can genuinely uphold:

• Non-exclusive territory: the franchisee understands that other outlets may operate within the same area.
• Exclusive territory: the franchisor provides specified protection for an agreed period.
• Conditional exclusive territory: protection applies as long as clearly defined conditions continue to be met.

These three options are commercial arrangements, not categories of rights automatically granted by the government. Ask a legal adviser to assess the clauses, including their compliance with competition law. Do not assume that provisions in a franchise agreement are exempt from all other legal restrictions.

2. Set boundaries that both parties can verify

Avoid descriptions such as “near the outlet”, “the main commercial area” or “the franchisee’s marketing area”. These terms can easily be interpreted differently once an attractive new location becomes available.

Attach a map with identifiable boundary markers. Boundaries might follow administrative divisions, specified stretches of road or a set distance from the outlet’s coordinates. If you use distance, explain whether it is measured in a straight line or along a travel route. Record the starting point for measurement so that verification does not depend on which app each party uses.

Include the following details in the appendix:

• the territory’s name and extent;
• the map’s date and version;
• the locations of existing company-owned and franchised outlets;
• any agreed exceptions;
• a procedure for dealing with changes to administrative boundaries.

Test those boundaries against the operational realities of your business. An outlet inside a shopping centre, for example, may have different customer traffic patterns from one across the road. A short distance does not necessarily mean the same market; a long distance does not necessarily separate customer bases either.

Before promising protection, review where customers come from, transport access, the concentration of activity in the area and the service capacity of existing outlets. Use that information to explain your decision, not to promise a particular level of turnover or profit.

3. Explain which activities the protection covers and any exceptions

A clause stating that “no other outlet will be opened” still leaves questions unanswered: does the restriction apply only to the franchisor, or does it also cover outlets granted to other franchisees? Does it include different outlet formats?

Clearly specify the parties and activities covered. If protection applies only to permanent outlets in a particular format, say so. If the company wishes to retain the option of opening at airports, railway stations or specially managed sites, state those exceptions from the outset.

Avoid overly broad exceptions, such as “the franchisor is free to undertake any activity according to business needs”. Such wording can render the promised protection meaningless.

Also distinguish protection against new outlet openings from restrictions on serving customers. Exclusive rights within a territory need not mean a ban on serving customers who live outside its boundaries. If a different arrangement applies, explain it separately and check its legal basis.

Make sure the descriptions in your sales materials do not go beyond the rights granted in the agreement. The franchise recruitment team must not promise that “the whole city is protected” when the appendix covers only a few streets.

4. Provide for reviews and changes without abrupt decisions

If exclusivity depends on performance, use indicators that can be verified and are reasonably within the franchisee’s control. Examples include compliance with agreed opening hours or service standards. Do not rely solely on vague assessments such as “the territory’s potential has not been fully realised”.

Specify the data sources, review period, who will carry out the assessment and the franchisee’s opportunity to provide an explanation. Where shortcomings can be remedied, provide written notice and an agreed period to put matters right before changing the protection.

Explain the consequences of failing to meet the conditions: will exclusive rights end, will their scope be reviewed, or must the parties negotiate first? Do not treat a change in territorial protection as equivalent to terminating the entire franchise relationship without a clear contractual basis.

Keep a register of territories already promised, together with their maps and exceptions. Check it before offering a location to the next prospective franchisee. Any boundary changes should be recorded in a written agreement, rather than left as conversations within the sales team.

Practical step: before offering your first territory, prepare one map, one clause defining the exclusive rights and one review procedure. If these three documents do not explain who is protected, against which activities and for how long, do not promise exclusivity.