Territorial exclusivity in franchising: how to define it

When you turn an existing business into a franchise network, you need to decide where your first franchisees can operate and what commitments you will make to them. Promising ‘a territory of your own’ is not enough: you must clarify the boundaries, protected activities and sales channels. Well-defined territorial exclusivity protects investment without creating expectations the franchisor cannot meet.

1. Decide what you want to protect

Before drawing a map, define exactly what you are promising. Allocating a territory for opening an outlet does not necessarily mean reserving every customer living in that area, or every order originating there, for the franchisee.

Start with three questions:

• Will the franchisor undertake not to open any further company-owned outlets in the territory?
• Will it also undertake not to appoint other franchisees there?
• Will the protection cover all activities within the franchise model, or only certain products, services or formats?

Your answers must align with your expansion plans. If the original business already sells to customers across several towns or cities, granting exclusivity without reviewing those relationships could create an immediate conflict.

Prepare an inventory of existing outlets, centrally managed customers and the sales channels already in use. Identify, for example, any supply arrangements with businesses operating across multiple sites, or services delivered in customers’ homes. Exceptions must be clearly identifiable before signing, not pieced together when the first complaint arrives.

2. Draw clear, viable boundaries

The size of a territory should not depend solely on a prospective franchisee’s availability or its distance from the original outlet. Consider the potential customer base, accessibility, competitors, travel times and the franchisee’s operational capacity.

Use data from the existing business to understand where customers actually come from. However, distinguish between observations and forecasts: customer behaviour recorded at one outlet does not guarantee identical results elsewhere.

Prepare a fact sheet for each territory covering:

• its geographical boundaries and the method used to identify them;
• any existing company-owned or franchised outlets;
• the commercial reasons for those boundaries;
• any activities or customers excluded from the protection;
• the version and date of the map attached to the agreement.

Avoid phrases such as ‘central district’ or ‘surrounding area’. If you use a radius, specify its starting point and how it is measured. If you use administrative boundaries or postcodes, explain how any changes to them will be handled.

A very large territory may look attractive, but it risks leaving demand unmet. One that is too small may lead to overlap between outlets. Compare several configurations and document why your chosen boundaries are compatible with the operating model, without presenting them as a guarantee of turnover.

3. Set out exclusivity in the agreement, in line with the law

In Italy, franchising is governed by Law No. 129 of 6 May 2004, concerning commercial franchising. Article 3 requires the agreement to be in writing, failing which it is void. It also requires the scope of any territorial exclusivity to be expressly stated, both in relation to other franchisees and to sales channels and outlets directly managed by the franchisor.

Exclusivity is therefore neither automatic nor mandatory. If it is granted, its scope must be defined. Any absence of exclusivity must also be communicated unambiguously, avoiding sales promises that conflict with the agreement.

Article 4 also requires a complete copy of the agreement and the prescribed attachments to be provided at least thirty days before signing. Territorial boundaries should therefore not remain a promise to be clarified after the agreement has been signed.

You must also distinguish between protection against new outlet openings and restrictions on sales. Competition rules apply too: EU Regulation 2022/720 provides, subject to certain conditions, a block exemption for categories of vertical agreements. Restrictions on active and passive sales require a specific assessment; simply calling them ‘exclusivity’ does not make them permissible.

Have a lawyer review, in particular, any clauses that prohibit serving customers outside the territory or restrict use of the internet. An unsolicited customer enquiry is not necessarily equivalent to sales activity targeted at another territory.

4. Establish rules for digital orders and network changes

A customer may see a national advertisement, order through the franchisor’s website and collect from a franchisee. To avoid disputes, define separately who makes the sale, who provides the service, who collects payment and what remuneration each party is entitled to.

Do not assume that the customer’s address settles every issue. Include practical examples covering deliveries, collections and enquiries received centrally, checking that they are consistent with the agreement and competition rules.

Also establish how you will handle any future request to change the boundaries. An agreed revision should be recorded in writing, with a new map, an effective date and rules for orders already accepted. Avoid treating a territorial change as a simple update to the operations manual.

In practice: before offering your first territory, prepare a map, a list of exceptions and some real sales scenarios. If these documents do not make it clear who can do what, the exclusivity arrangement is not yet ready to be offered.