Territorial exclusivity in franchising: how to define it

When you turn an existing business into a franchise network, allocating territories means more than simply drawing circles on a map. You need to understand where each franchisee can operate sustainably, what commitments you can make and how shops, home services and online sales will coexist. A clear territorial policy, prepared before you start offering franchises, reduces ambiguous promises and future disputes.

1. Start with the customer catchment area, not municipal boundaries

Your existing outlet’s catchment area is a useful starting point, but not necessarily a model to copy. A long-established business may attract customers from further afield thanks to its founder’s reputation: a new franchisee may not have the same advantage.

Analyse where your customers come from using aggregated data collected lawfully. Compare purchase frequency, travel times, accessibility, competitors and local destinations that draw customers to the area. For a business-to-business service, the number of suitable potential clients matters too, not just the resident population.

Prepare a profile for each proposed area, covering:

• boundaries and main transport links;
• potential demand and the sources used to estimate it;
• competitors and your business’s existing outlets;
• local costs that could affect viability;
• any overlaps with other areas.

Always distinguish observations from assumptions. The original shop’s actual customers are a matter of fact; forecast demand in another city is an estimate that needs testing. Do not present a territory as a guarantee of turnover: exclusivity limits certain decisions within the network, but it neither removes competition nor guarantees results.

2. Define exactly what you are promising

Exclusivity may cover the opening of other franchised outlets, premises operated directly by the franchisor or specific commercial activities. These aspects do not automatically overlap. Simply writing ‘exclusive territory’ leaves too many questions unanswered.

Italian Law No. 129 of 6 May 2004, which governs franchising in Italy, requires franchise agreements to be in writing; otherwise, they are void. Article 3 also requires the agreement to specify the scope of any territorial exclusivity, both in relation to other franchisees and to sales channels and outlets operated directly by the franchisor. Exclusivity is therefore optional: it does not arise automatically from the franchise relationship.

Set out your commitment in a map attached to the agreement and a matching written description. Specify which activities are covered, which channels are excluded and how particular locations, such as stations or shopping centres, are treated. If you use postcodes or administrative boundaries, establish how any changes to them will be handled.

Avoid leaving the redefinition of the territory solely to the franchisor’s discretion. Any conditions for retaining, expanding or revising it must be understandable, verifiable and legally reviewed. Sales materials must respect these limits too: do not verbally promise broader protection than the written agreement provides.

3. Separate physical presence, online sales and unsolicited enquiries

Before allocating a territory, list every way your business reaches customers: shops, websites, third-party platforms, deliveries, remote consultations, corporate agreements and temporary initiatives. For each, clarify who makes the sale, who delivers the service and who handles complaints and returns.

Imagine a customer living in one franchisee’s territory who buys from the franchisor’s website and collects the order from another shop. You need to know whether the order is credited to anyone, what fee, if any, is paid for handling collection and who bears the cost of a return. These operational decisions should be made before disputes arise.

Freedom of contract is, however, subject to competition law. Regulation (EU) 2022/720, which provides a block exemption for certain categories of vertical agreements, and the related EU guidelines are important reference points for franchise networks too. Among other things, they distinguish between active and passive sales: deliberately seeking customers in an area is not the same as responding to an unsolicited enquiry.

Do not therefore assume that you can prohibit all sales outside a territory or impose blanket restrictions on online purchases. The restrictions permitted depend on the distribution system and the applicable conditions. Have the clauses checked by a competition law specialist, rather than turning a logistical rule into an unlawful sales restriction.

4. Test the rules before allocating territories

Run a simulation with the people responsible for network development, sales and operations. Work through practical scenarios: two franchisees approach the same business; a customer moves address; a new shopping destination opens; or the franchisor receives a nationwide enquiry involving several territories.

For each scenario, record the applicable rule, who is responsible for the decision and which documents are needed. Also establish a procedure for reporting overlaps, hearing the parties involved and explaining the outcome. Keep an up-to-date map of commitments already made, accessible to those offering new franchises.

Finally, ensure that the map, agreement and sales presentations are consistent. Italian Law No. 129/2004 requires prospective franchisees to receive a complete copy of the agreement, together with the required annexes, at least thirty days before signing: the territory’s definition should not remain a promise to be clarified later.

What to do now: choose a proposed territory, describe what exclusivity covers and test three possible conflicts between channels. If the answers are not clear-cut, clarify the rules before offering that territory.